Exhibit
10.29


 


RETROCESSION AGREEMENT



by and between



ACE CAPITAL RE OVERSEAS LTD.
of Hamilton, Bermuda,

referred to in this Agreement as the “Ceding Company,”


 


and


 


ACE
AMERICAN INSURANCE COMPANY

of Philadelphia,
Pennsylvania

referred to in this Agreement as the “Retrocessionaire.”


 


In consideration of the mutual covenants and upon the terms and
conditions set forth in this Agreement, the Ceding Company and the
Retrocessionaire hereby agree as follows:


 


1.             Coverage.  The
Ceding Company shall cede, and the Retrocessionaire shall accept, a one hundred
percent (100%) quota share of the liability incurred by the Ceding Company
pursuant to the Aggregate Loss Portfolio Reinsurance Agreement (the “Underlying
Agreement”) effective as of July 1, 2001, by between the Ceding Company and
Commercial Guaranty Assurance, Ltd. (the “Original Company”). A copy of the
Underlying Agreement is attached as Exhibit A and made a part of this Agreement
for purposes of more fully defining the rights and obligations of the Ceding Company
and the Retrocessionaire


 

















 


hereunder. 
For greater certainty, but without limiting the generality of the
foregoing, the Retrocessionaire agrees to indemnify the Ceding Company for 100%
of the Ultimate Net Loss, 100% of the C Profit Share and 100% of the Litigation
Losses (as such terms are defined in the Underlying Agreement) paid by the
Ceding Company pursuant to the Underlying Agreement.


 


2.             Retrocession Premium.  The
Retrocessionaire shall be entitled to receive (i) 100% of the Reinsurance Premium
(as such term is defined in the Underlying Agreement) less five hundred
thousand dollars ($500,000), (ii) 100% of the Reserve Transfer Amount (as such
term is defined in the Underlying Agreement) and (iii) 100% of the Net Premiums
from Operations (as such term is defined in the Underlying Agreement) and all
other amounts received by the Ceding Company from the Original Company under
Section 4.3 of the Underlying Agreement.


 


3.             Recovery Amounts.  The
Retrocessionaire shall be entitled to receive 100% of any and all recoveries,
subrogation and inuring reinsurance amounts actually collected that are
included in calculating Ultimate Net Loss.


 


4.             Conditions.  No
amendment to the Underlying Agreement executed after the date on which the
Retrocessionaire executes


 


2

















 


this Agreement shall be binding upon the
Retrocessionaire unless agreed to in writing by the Retrocessionaire.


 


5.             Accounting and Settlement.  (a)
All amounts due to be paid to the Ceding Company under this Agreement shall be
paid by the Retrocessionaire to the Ceding Company, in accordance with
subsection (c) of this Section 5, no later than two (2) Business Days (as
defined in the Underlying Agreement) after receipt by the Retrocessionaire of
notification by the Ceding Company of the amount due to be paid hereunder.


 


(b)           The Ceding Company shall provide quarterly
and other reports providing financial and other data to the Retrocessionaire
pursuant to this Agreement within five (5) Business Days of receipt by the
Ceding Company of such reports pursuant to the Underlying Agreement and shall
pay, concurrent with the delivery of each such report, all amounts shown
thereon as due to the Retrocessionaire under the terms of this Agreement.


 


(c)           All payments made pursuant to this Agreement
shall be made by wire transfer of immediately available non-reversible United
States federal funds to such bank account or accounts as


 


3

















 


designated by the recipient or, where
applicable, into or out of the Trust Account (as defined herein).


 


6.             Trust Account.  (a)
The Retrocessionaire shall enter into a trust agreement in the form attached as
Exhibit B (the “Trust Agreement”) and establish a trust account (the “Trust
Account”) for the benefit of the Ceding Company with respect to the Underlying
Agreement with a bank (the “Trustee”) acceptable to the Ceding Company.


 


(b)           The Retrocessionaire agrees to deposit, and
maintain in the Trust Account, assets to be held in trust by the Trustee for
the benefit of the Ceding Company as security for the payment of the
Retrocessionaire’s obligations to the Ceding Company under this Agreement.


 


(c)           The Retrocessionaire agrees that the assets
so deposited shall consist only of assets of the types set forth on Schedule I
hereto.


 


(d)           The Retrocessionaire, prior to depositing
assets with the Trustee, shall execute all assignments and endorsements in
blank, or transfer legal title to the Trustee of all shares, obligations or any
other assets requiring assignments, in order


 


4

















 


that the Ceding Company, or the Trustee upon
direction of the Ceding Company, may whenever necessary negotiate any such
assets without consent or signature from the Retrocessionaire or any other
entity.


 


(e)           All settlements of account under the Trust
Agreement between the Ceding Company and the Retrocessionaire shall be made in
cash or its equivalent.


 


(f)            The Retrocessionaire and the Ceding Company
agree that the assets in the Trust Account may be withdrawn by the Ceding
Company at any time, notwithstanding any other provisions in this Agreement,
provided such assets are applied and utilized by the Ceding Company (or any
successor of the Ceding Company by operation of law, including, without
limitation, any liquidator, rehabilitator, receiver or conservator of the
Ceding Company), on the basis of the liability of the Ceding Company under the
Underlying Agreement, without diminution because of the insolvency of the
Ceding Company or the Retrocessionaire, only to pay to the Ceding Company an
amount equal to the Retrocessionaire’s quota share of the liabilities paid or
due to be paid by the Ceding Company under the Underlying Agreement.


 


5

















 


(g)           In the event that the Ceding Company
withdraws assets from the Trust Account for the purpose set forth in paragraph
(f) of this Section 6 in excess of actual amounts required to meet the
Retrocessionaire’s obligations to the Ceding Company, the Ceding Company will
return such excess to the Trust Account, plus interest at the average 90-Day
Treasury Rate applicable to the period during which the amounts were held by
the Ceding Company. “90-day Treasury Rate” as used herein shall mean the annual
yield rate, on the date to which such 90-Day Treasury Rate relates, of actively
traded U.S.  Treasury securities having
a remaining duration to maturity of three months, as such rate is published
under “Treasury Constant Maturities” in Federal Reserve Statistical Release
H.15(519).


 


(h)           The initial deposit to the Trust Account
shall be the sum of sixty million dollars ($60,000,000). The Retrocessionaire
further agrees to deposit into the Trust Account, when received, (i) an amount
equal to the Net Premiums from Operations received by the Retrocessionaire with
respect to the calendar year 2001 and (ii) annually beginning with calendar
year 2002, an amount equal to the Net Premiums from Operations received by the
Retrocessionaire with respect to such year, in excess of five hundred thousand
dollars ($500,000).


 


6

















 


(i)            The parties shall periodically review the
assets in the Trust Account against the Retrocessionaire’s remaining
obligations under this Agreement and, as appropriate, release assets from the
Trust Account to the Retrocessionaire.


 


(j)            The Retrocessionaire shall be liable for all
reasonable and customary bank charges actually incurred by the Retrocessionaire
with respect to the Trust Account.


 


7.             Notices.  Any
notice required or permitted hereunder shall be in writing and shall be (i)
delivered personally (by courier or otherwise), (ii) sent by facsimile
transmission with confirmation of receipt and with subsequent personal delivery
or express delivery of the original notice, (iii) transmitted by electronic
mail with confirmation of receipt and with subsequent personal delivery or
express delivery of the original notice or (iv) sent by express delivery, as
follows:


 


If to the Ceding Company:


 


ACE
Capital Re Overseas Ltd.


11
Victoria Hall


Victoria
Street


P.O.
Box 1828


Hamilton
HM HX


Bermuda


Attention:  Corporate Secretary


Telephone
No.:  441-297-9730


Telecopier
No.:  441-297-9704


Email:  rebecca.carne@marshmc.com


 


7

















 


With a copy to:


 


ACE
Capital Re Inc.


1325
Avenue of the Americas


New
York, New York 10019


Attention:  General Counsel


Telephone
No.:  212-974-0100


Telecopier
No.:  212-581-3268


Email:  nbregman@acecapitalre.com


 


If to the Retrocessionaire
to it at:


 


ACE
Financial Solutions


1133
Avenue of the Americas


32nd
Floor


New
York, New York  10036


Attention:  President


Telephone
No.:  212-642-7807


Telecopier
No.:  212-642-7889


Email:  robert.omahne@ace-ina.com


 


8.             Duration; Termination.  This
Agreement shall continue in force until the expiry of the Underlying Agreement
in accordance with the terms thereof and all amounts due under this Agreement
have been paid.


 


9.             Insolvency.  (a)
In the event of the insolvency of the Ceding Company, all payments due the Ceding
Company under this Agreement shall be payable by the Retrocessionaire directly
to the Ceding Company or to its liquidator, receiver, conservator or statutory
successor on the basis of the liability of the Ceding Company under the policy
or policies reinsured, without diminution because of the insolvency of the
Ceding Company.  It


 


8

















 


is agreed and understood, however, (i) that
in the event of the insolvency of the Ceding Company the Retrocessionaire shall
be given written notice of the pendency of a claim against the insolvent Ceding
Company on the Underlying Agreement within a reasonable time after such claim
is filed in the insolvency proceeding and (ii) that during the pendency of such
claim the Retrocessionaire may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated any defenses
which it may deem available to the Ceding Company or its liquidator, receiver
or statutory successor.


 


(b)           It is further understood that any expense
thus incurred by the Retrocessionaire shall be chargeable, subject to court
approval, against the insolvent Ceding Company as part of the expense of
liquidation to the extent of a proportionate share of the benefit which may
accrue to the Ceding Company solely as a result of the defense undertaken by
the Retrocessionaire.  Where two or more
assuming reinsurers are involved in the same claim and a majority in interest
elect to interpose defenses to such claim, the expense shall be apportioned in
accordance with the terms of this Agreement as though such expense had been
incurred by the Ceding Company.


 


9

















 


10.           Arbitration.  (a)
Any dispute between the Ceding Company and the Retrocessionaire arising out of
the provisions of this Agreement, or concerning its interpretation or validity,
whether arising before or after termination of this Agreement, shall be
submitted to arbitration in the manner set forth in this Section 10.  Either party may initiate arbitration of any
such dispute by giving written notice to other party of its intention to
arbitrate and of its appointment of an arbitrator in accordance with Section 10
(c).


 


(b)           Unless the parties agree upon a single
arbitrator within fifteen (15) days after the receipt of notice of intention to
arbitrate, all disputes shall be submitted to an arbitration panel composed of
two arbitrators and an umpire, chosen in accordance with Sections 10 (c) and
10(d).


 


(c)           The party requesting arbitration (hereinafter
referred to as the “claimant”) shall appoint an arbitrator and give written
notice thereof to the other party (hereinafter referred to as the “respondent”)
together with its notice of intention to arbitrate.  Unless a single arbitrator is agreed upon within fifteen (15)
days after the receipt of the notice of intention to arbitrate, the respondent
shall, within thirty (30) days after receiving such notice, also appoint an
arbitrator and


 


10

















 


notify the claimant thereof.  Before instituting a hearing, the two
arbitrators so appointed shall choose an umpire.  If, within twenty (20) days after they are both appointed, the
arbitrators fail to agree upon the appointment of an umpire, the umpire shall
be appointed by the President of the American Arbitration Association.  All members of the arbitration panel shall
be active or former insurance or reinsurance executives having relevant
knowledge of the matters in dispute, and shall be impartial third parties
without past employment or directorial relations with the parties to the
arbitration and their parents and/or affiliates.


 


(d)           If the respondent fails to appoint an
arbitrator within thirty (30) days after receiving a notice of intention to arbitrate,
such arbitrator shall be appointed by the President of the American Arbitration
Association, and shall then, together with the arbitrator appointed by the
claimant, choose an umpire as provided in Section 10(c).


 


(e)           If the Ceding Company is involved in a
dispute under the terms of this Agreement and in one or more separate disputes
with one or more other reinsurers in which common questions of law or fact are
in issue, the Ceding Company or the Retrocessionaire, at their option, may join
with such other


 


11

















 


reinsurer in a common arbitration proceeding
under the terms of this Section 10. If the Ceding Company and such other
reinsurers have commenced arbitration, the Retrocessionaire may at its option
join such proceeding for the determination of the dispute between the Ceding
Company and the Retrocessionaire.


 


(f)            Any arbitration instituted pursuant to this
Section 10 shall be held in New York, New York.


 


(g)           Unless otherwise extended by the arbitration
panel, or agreed to by the parties, each party shall submit its case to the
panel within thirty (30) days after the selection of an umpire.


 


(h)           All proceedings before the panel shall be
informal and the panel shall not be bound by the formal rules of evidence.  The panel shall have the power to fix all
procedural rules relating to the arbitration proceeding.  In reaching any decision, the panel shall
give due consideration to the custom and usage of the insurance and reinsurance
business.


 


(i)            The arbitration panel shall render its
decision within sixty (60) days after termination of the proceeding, which
decision shall be in writing, stating the reason therefor.  The


 


12

















 


decision of the majority of the panel shall
be final and binding on the parties to the proceeding.


 


(j)            All fees and expenses of the arbitration,
including the fees and expenses of each arbitrator and the umpire, shall be
allocated to the Ceding Company and the Retrocessionaire as assessed by the
panel.


 


(k)           The arbitration panel does not have the
jurisdiction to authorize any punitive damage awards between the parties.


 


13.           Headings and Schedules. 
Headings used herein are not a part of this Agreement and shall not
affect the terms hereof.  The attached
Schedules and Exhibits are a part of this Agreement.


 


14.           Successors and Assigns.  This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors, permitted assigns and legal representatives.  Neither this Agreement, nor any right
hereunder, may be assigned by either party without the prior written consent of
the other party hereto.


 


13

















 


15.           Execution in Counterpart.  This
Agreement may be executed by the parties hereto in any number of counterparts,
and by each of the parties hereto in separate counterparts, each of which
counterparts, when so executed and delivered, shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.


 


16.           Currency. 
Whenever the word “dollars” or the “$” sign appear in this Agreement,
they shall be construed to mean United States Dollars, and all transactions
under this Agreement shall be in United States Dollars.


 


17.           Amendments.  This
Agreement may not be changed, altered or modified unless the same shall be in
writing executed by the Ceding Company and the Retrocessionaire.


 


18.           Governing Law.  This
Agreement shall be interpreted and governed by the laws of Bermuda without
regard to its rules with respect to conflicts of law.


 


19.           No Waiver.  No
consent or waiver, express or implied, by any party to or of any breach or
default by any other party in the performance by such other party of its
obligations hereunder shall be deemed or construed to be a consent or waiver to
or of


 


14

















 


any other breach or default in the
performance of obligations hereunder by such other party hereunder.  Failure on the part of any party to complain
of any act or failure to act of any other party or to declare any other party
in default, irrespective of how long such failure continues, shall not
constitute a waiver by such first party of any of its rights hereunder.


 


20.           Entire Agreement.  This
Agreement represents the entire agreement between the Ceding Company and the
Retrocessionaire and supersedes, with respect to its subject matter, any prior
oral or written agreements between the parties.


 


21.           Parties to the Agreement.  This
is an Agreement for indemnity reinsurance solely between the Ceding Company and
the Retrocessionaire.  The acceptance of
reinsurance under this Agreement shall not create any right or legal relation
whatever between the Retrocessionaire and the Original Company or any
policyholder, beneficiary or other person whose policy is ceded by the Original
Company pursuant to the Underlying Agreement.


 


IN WITNESS
WHEREOF, the parties
hereto have caused this Agreement to be executed on July 26, 2001 by their duly
authorized representatives.


 


15

















 


	
   

  	
  ACE CAPITAL
  RE OVERSEAS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/

  	
   Rebecca L. Carne

  	
   

  
	
   

  	
  Title

  	
  Director

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE AMERICAN
  INSURANCE COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/

  	
  [ILLEGIBLE]

  	
   

  
	
   

  	
  Title

  	
  EVP

  	
   

  
								



 


16

















 


Schedule I


 


Permitted
Assets


 


In addition to cash (United States legal
tender), the following shall be permissible trust account assets provided that,
at the time of deposit, the securities are (a) rated A or higher by a
nationally recognized rating agency; (b) secured by sufficient collateral; (c)
insured by an appropriately licensed insurer (other than the investing insurer
or its affiliate) that has a rating of A or higher from A.M. Best Company, Inc.
(or an equivalent rating from another nationally recognized rating agency); or
(d) rated in the highest category by the Securities Valuation Office of the
National Association of Insurance Commissioners:


 


I.              Government obligations - any obligation that is issued, assumed, guaranteed
or insured by the U.S. or any agency thereof, by any U.S. state, by any
municipality or by any state agency (excluding any municipality or state agency
bond payable only out of special assessments on local properties);


 


II.            Obligations of American
Institutions - any
obligation issued or guaranteed by any solvent American Institution with the
exception of insurance companies, provided that such obligations are not in
default as to principal or interest;


 


III.           Preferred or guaranteed
shares of solvent American Institutions - permissible provided that all obligations of the issuer (not merely
the investment to be deposited) satisfy the credit quality criteria (a) or (d)
in the first paragraph above;


 


IV.           Equity Interests - Investments in common shares or
partnership interests of any solvent American institution, provided that the
share/interest is registered on a national securities exchange (or quoted
through NASDAQ) or otherwise registered pursuant to the Securities Exchange Act
of 1934. All obligations and preferred shares (if any) of the issuer (not
merely the investment to be deposited) must be eligible investments pursuant to
Section 1404(a) of the New York Insurance Law;


 


17

















 


V.            Investment Companies -


 


1.             Investment company that invests at least 90%
of assets in investments qualifying under Items (I), (II) and (III) above.


 


2.             Investment company that invests at least 90%
of assets in investments qualifying under Item (IV) above; and


 


VI.           Asset backed securities - Pass-through certificates, participation
interests, trust certificates or obligations, collateralized debt obligations,
limited recourse securities and similar securities, in each case secured by
pooled receivables arising from the sale or use of personal property or the
sale or use of real property or secured by mortgages on real property or other
pooled receivables or assets that provide similar diversified credit risk and
certificates, interests, limited recourse debt securities and similar
securities secured by any of the foregoing securities.


 


The term “American Institution,” as used in
this Schedule I shall mean an institution created or existing under the laws of
the United States of America or of any state, district or territory thereof.


 


18

















 


Exhibit A


 


Aggregate
Loss Portfolio Reinsurance Agreement


 

















 


AGGREGATE LOSS PORTFOLIO REINSURANCE AGREEMENT


 


between


 


COMMERCIAL GUARANTY ASSURANCE, LTD.


 


Hamilton, Bermuda


 


and


 


ACE CAPITAL RE OVERSEAS LTD.


 


Hamilton, Bermuda


 

















 


TABLE OF CONTENTS


 


 


	
  Article I
  DEFINITIONS

  	
   

  
	
   

  	
   

  
	
  Article II COVERAGE

  	
   

  
	
   

  	
   

  
	
  Article III GENERAL PROVISIONS

  	
   

  
	
   

  	
   

  
	
  Article IV REINSURANCE PREMIUM

  	
   

  
	
   

  	
   

  
	
  Article V ACCOUNTING AND SETTLEMENT

  	
   

  
	
   

  	
   

  
	
  Article VI RESERVES

  	
   

  
	
   

  	
   

  
	
  Article VII DURATION AND TERMINATION

  	
   

  
	
   

  	
   

  
	
  Article VIII C PROFIT SHARE

  	
   

  
	
   

  	
   

  
	
  Article IX INSOLVENCY

  	
   

  
	
   

  	
   

  
	
  Article X ARBITRATION

  	
   

  
	
   

  	
   

  
	
  Article XI EXCLUSIONS

  	
   

  
	
   

  	
   

  
	
  Article XII MISCELLANEOUS PROVISIONS

  	
   

  
	
   

  	
   

  
	
  SCHEDULES

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  SCHEDULE 1

  	
  –

  	
  CEDED REINSURANCE AGREEMENTS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 2

  	
  –

  	
  FINANCING VEHICLES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 3

  	
  –

  	
  RESERVES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  SCHEDULE 4

  	
  –

  	
  REPACK FINANCING VEHICLES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  EXHIBITS

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  EXHIBIT A

  	
  –

  	
  Administrative Services Agreement

  	
   

  
						



 


i

















 


AGGREGATE LOSS PORTFOLIO REINSURANCE AGREEMENT


 


This Agreement, dated this 18th day of July, 2001 (this “Agreement”) is
made and entered into by and between Commercial Guaranty Assurance, Ltd., a
company with limited liability organized under the laws of Bermuda (the
“Company”), and ACE Capital Re Overseas Ltd., a company with limited liability
organized under the laws of Bermuda (the “Reinsurer”).


 


The Company and the Reinsurer mutually agree to reinsure under the terms
and conditions stated herein.  This
Agreement is an indemnity reinsurance agreement solely between the Company and
the Reinsurer, and the performance of the obligations of each party under this
Agreement shall be rendered solely to the other party.  In no instance, except as set forth in
Article IX of this Agreement, shall anyone other than the Company or the
Reinsurer have any rights under this Agreement.


 


ARTICLE I


 


DEFINITIONS


 


1.1.         Definitions.  As used in this Agreement,
the following terms shall have the following meanings (definitions are
applicable to both the singular and the plural forms of each term defined in
this Article):


 


“ACE Limited” shall have the meaning set forth in Section 8.2.


 


1

















 


“Administrative Services Agreement” means the Administrative
Services Agreement by and between the Company and the Reinsurer, dated as of
the date hereof, in the form attached hereto as Exhibit A.


 


“Affiliate” means, with respect to any Person, at the time in
question, any other Person controlling, controlled by or under common control
with such Person.  For purposes of the
foregoing, “control”, including the terms “controlling”, “controlled by” and
“under common control with”, means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of an
institution, whether through the ownership of voting securities, by contract or
otherwise.


 


“Affiliate Reinsurance Agreement” means the Aggregate Excess of
Loss Reinsurance Agreement entered into between the Company and ACE Bermuda
Insurance Ltd., a company with limited liability organized under the laws of
Bermuda, dated as of the date hereof.


 


“Aggregate Limit” shall have the meaning specified in Section
2.1.


 


“Agreement” shall have the meaning specified in the introductory
paragraph hereof.


 


“Allocated Loss Adjustment Expenses” shall mean all expenses
incurred by the Company in connection with the investigation, settlement,
defense or mitigation of any claim or loss under the Reinsured Contracts, but
shall exclude the salaries of the Company’s employees, office expenses and any
other overhead expenses.


 


2

















 


“Business Day” means any day other than a Saturday, Sunday, a
day on which banking institutions in Bermuda or the State of New York are
permitted or obligated by law to be closed or a day on which the New York Stock
Exchange is closed for trading.


 


“C Profit Share” shall have the meaning set forth in Section
8.1.


 


“C Profit Share Losses” shall have the meaning set forth in
Section 8.3.


 


“Ceded Reinsurance Agreements” means those agreements of
reinsurance ceded by the Company and described on Schedule 1 hereto.


 


“CFS” shall have the meaning set forth in Section 8.3.


 


“CGA” means CGA Group, Ltd., a company with limited liability
organized under the laws of Bermuda.


 


“CGAIM” means CGA Investment Management, Inc., a Delaware
corporation.


 


“Controlled Person” shall have the meaning set forth in Section
12.10.


 


“Derivative Contracts” means credit default swaps.


 


“GAAP” means United States generally accepted accounting
principles, consistently applied.


 


“Egler Litigation” means the pending lawsuit captioned Egler
v. CGA Investment Management, Inc., filed in the Supreme Court of the State
of New York, County of New York.


 


3

















 


“Financing Vehicles” means the financing vehicles set forth on
Schedule 2 hereto and any additional financing vehicles created pursuant to the
authority of the manager under the Management Agreement dated as of the date
hereof by and between INAC Corp., a corporation organized under the Laws of
Delaware, and CGAIM.


 


“Inception Date” shall have the meaning specified in Section
2.1.


 


“Insolvency Fund” shall have the meaning specified in Section
11.2.


 


“Litigation Defense Expenses” means all costs and expenses
incurred by the Company, CGA or CGAIM (or by a manager affiliated with the
Reinsurer on behalf of the Company, CGA or CGAIM, as applicable) (including attorneys
fees and expenses) not previously paid or reserved (such reserves set forth on
Schedule 3) of defending, negotiating, settling, or avoiding any lawsuit,
action or regulatory proceeding against CGA, CGAIM or the Company, other than
any such lawsuit, action or proceeding relating to any claim or loss under a
Reinsured Contract, in excess of the amount covered by applicable insurance.


 


“Litigation Losses” means any monetary settlement or final,
non-appealable monetary judgment rendered against CGA, CGAIM or the Company as
the result of any lawsuit, action or proceeding other than a lawsuit, action or
proceeding relating to any claim or loss under a Reinsured Contract in excess
of the amount covered by applicable insurance and, in the case of the Egler Litigation,
in excess of an


 


4

















 


amount equal to (i) the reserve amount set
forth on Schedule 3 hereto less (ii) Litigation Defense Expenses applicable to
the Egler Litigation.


 


“Net Premiums from Operations” means (a) premiums and all other
amounts received by the Company with respect to the Reinsured Contracts, other
than with respect to Derivative Contracts and Reinsured Contracts issued to or
for the benefit of the Financing Vehicles plus (b) all income received by the
Company from Derivative Contracts plus (c) premiums and all other amounts due
to the Company from the Financing Vehicles, whether with respect to Reinsured
Contracts issued to or for the benefit of the Financing Vehicles or otherwise.


 


“Noncontractual Damages” shall have the meaning specified in
Section 11.1.


 


“Person” means any individual, corporation, partnership, firm,
joint venture, association, limited liability company, limited liability
partnership, joint-stock company, trust, unincorporated organization,
governmental, judicial or regulatory body, business unit, division or other
entity.


 


“Reinsurance Premium” shall have the meaning specified in
Section 4.1.


 


“Reinsured Contracts” means all contracts, binders, polices or
other agreements of insurance and assumed reinsurance and all Derivative
Contracts (whether or not accounted for as contracts of


 


5

















 


insurance) issued by the Company prior to the
Inception Date or issued on behalf of the Company on or after the Inception
Date pursuant to the authority of the administrator under the Administrative
Services Agreement.


 


“Repack Financing Vehicles” shall have the meaning specified in
Section 8.3.


 


“Required Rating” means a rating of A- or higher by Standard
& Poor’s or a rating of A3 or higher by Moody’s Investors Service.


 


“Reserve Transfer Amount” means the amount set forth in Section
4.1, which is an amount equal to the unearned premium reserves and the loss
reserves of the Company as of the Inception Date (including general reserves,
case basis reserves and reserves for Allocated Loss Adjustment Expenses),
determined in all instances in accordance with GAAP.


 


“Series C Preference Stock” means the Series C Convertible
Cumulative Voting Preference Shares, par value U.S.$.01 per share, of CGA.


 


“Third Party Accountants” shall have the meaning specified in
Section 8.3.


 


“Ultimate Net Loss” shall have the meaning specified in Section
2.3.


 


6

















 


ARTICLE II


 


COVERAGE


 


2.1.         Coverage. 
Effective as of 12:01 a.m., Eastern Daylight Time, on July 1, 2001 (the
“Inception Date”), the Company reinsures with the Reinsurer, and the Reinsurer
indemnifies the Company for, all Ultimate Net Loss of the Company paid after
the Inception Date.  The Reinsurer’s
limit of liability under or related to this Agreement with respect to Ultimate
Net Loss (the “Aggregate Limit”) shall, notwithstanding any other provisions of
this Agreement to the contrary, be one hundred ten million dollars
($110,000,000) in the aggregate.  The
Reinsurer also agrees to indemnify the Company for such Litigation Losses as
the Reinsurer, in its sole discretion, elects to fund.


 


2.2.         Conditions.  No
changes made on or after the Inception Date in the terms and conditions of the
Reinsured Contracts which affect the Reinsurer’s liability shall be covered
hereunder without the prior approval of such changes by the Reinsurer, or
unless such changes were made by the administrator pursuant to the
Administrative Services Agreement.  In
the event any such changes are made in any Reinsured Contract in violation of
the previous sentence, this Agreement will cover Ultimate Net Loss arising from
such Reinsured Contract as if the non-approved changes had not been made.  No Reinsured Contract that is an agreement
of assumed reinsurance shall be commuted without the prior approval of the
Reinsurer, which shall not be unreasonably withheld or delayed.


 


7

















 


2.3.         Ultimate
Net Loss.  (a) “Ultimate Net Loss” shall mean (i) the
actual amount paid by the Company on its net retained liability under the
Reinsured Contracts (including, with respect to Reinsured Contracts that are
contracts of assumed reinsurance, all amounts paid by the Company to cedents
with respect to losses or loss adjustment expenses and including with respect
to Reinsured Contracts that are Derivative Contracts, net amounts due to
counterparties from the Company under the terms of such contracts), after
making deductions for all recoveries, subrogations and inuring reinsurance
actually collected (other than such amounts collected under this Agreement and
other than such amounts which constitute premiums under Section 4.3(ii)), plus
(ii) Allocated Loss Adjustment Expenses paid by the Company, plus (iii) an
amount equal to any additional premium due under the Ceded.  Reinsurance Agreements; provided that
Ultimate Net Loss shall not include any amounts excluded under Article XI.


 


(b)           All recoveries or payments received by the
Company subsequent to a loss settlement under this Agreement shall be applied
as if recovered or received prior to the aforesaid settlement and all necessary
adjustments shall be made by the parties hereto, provided, that
nothing in this Section 2.3(b) shall be construed to mean that the Reinsurer’s
obligation to pay losses under this Agreement do not arise until the Company’s
Ultimate Net Loss has been ascertained, and the Reinsurer agrees that it shall
be obligated to pay directly or to the Company amounts equal to the Company’s
gross liability with respect to


 


8

















 


losses and Allocated Loss Adjustment
Expenses, subject to the limits and exclusions set forth herein on the
liability of the Reinsurer and subject to the Reinsurer’s right to receive such
recoveries or payments subsequent to any such loss settlements.


 


2.4.         Territory.  The territorial limits of
this Agreement shall be identical with those of the Reinsured Contracts.


 


ARTICLE III


 


GENERAL PROVISIONS


 


3.1.         Contract
Administration.  Pursuant to the Administrative Services
Agreement, the Company has appointed the Reinsurer (or its permitted assignee)
to perform administrative services with respect to the Reinsured Contracts and
the Reinsurer has agreed to perform such services on behalf of the Company.


 


3.2.         Inspection.  The
Reinsurer or its designated representative may inspect, at the offices of the
Company or elsewhere where such records are located, the papers and any and all
other books or documents of the Company reasonably relating to the Reinsured
Contracts and the Ceded Reinsurance Agreements, during normal business hours
for such period as this Agreement is in effect or for as long thereafter as the
Company seeks performance by the Reinsurer pursuant to the terms of this
Agreement.


 


3.3.         Misunderstandings
and Oversights.  If any delay, omission, error or failure to
pay amounts due or to perform any other


 


9

















 


act required by this Agreement is unintentional
and caused by misunderstanding or oversight, the Company and the Reinsurer will
adjust the situation to what it would have been had the misunderstanding or
oversight not occurred.  The party first
discovering such misunderstanding or oversight, or an act resulting from such
misunderstanding or oversight, will notify the other party in writing promptly
upon discovery thereof, and the parties shall act to correct such
misunderstanding or oversight within twenty (20) Business Days of such other party’s
receipt of such notice.  However, this
Section shall not be construed as a waiver by either party of its right to
enforce strictly the terms of this Agreement.


 


3.4.         Payments.  All
payments made pursuant to this Agreement shall be made by wire transfer of
immediately available non-reversible United States federal funds to such bank
account or accounts as designated by the recipient.


 


3.5.         Setoff  (a)
Notwithstanding anything in this Agreement to the contrary, in the event of
insolvency of the Company, payments of Ultimate Net Loss due the Company (or
its liquidator, receiver, conservator or statutory successor, as the case may
be) under this Agreement and reinsurance premium and/or recovery amounts due
the Reinsurer under Sections 4.3 and 2.3(b), respectively, but not yet paid to
the Reinsurer (other than such failure to pay caused by the administrator under
the Administrative Services Agreement) are deemed


 


10

















 


mutual debts or credits, as the case may be,
and shall be set off, and only the net balance shall be allowed or paid.


 


(b)           The C Profit Share when due under Article 8
and reinsurance premium and/or recovery amounts due the Reinsurer under
Sections 4.3 and 2.3(b), respectively, but not yet paid to the Reinsurer (other
than such failure to pay caused by the administrator under the Administrative
Services Agreement) are deemed mutual debts or credits, as the case may be, and
shall be set off, and only the net balance shall be allowed or paid.


 


ARTICLE IV


 


REINSURANCE PREMIUM


 


4.1.         Reinsurance
Premium.  On or before the Inception Date, the Company
shall pay to the Reinsurer the sum of fifty-nine million, four hundred
sixty-eight thousand, five hundred and fifty-four dollars ($59,468,554.00) (the
“Reinsurance Premium”) plus eight million, thirty-one thousand, four hundred
and forty-six dollars ($8,031,446.00) as the Reserve Transfer Amount.


 


4.2.         Premium
Earned.  The Reinsurance Premium and the Reserve
Transfer Amount shall be considered fully earned when received by the Reinsurer
and shall be non-refundable.


 


4.3.         Additional
Reinsurance Premium.  In addition to the Reinsurance Premium and
the Reserve Transfer Amount, the Company shall pay to the Reinsurer (i) an
amount equal to the Net Premiums from


 


11

















 


Operations collected during each calendar
quarter (or part thereof) that this Agreement is in effect, and (ii) an amount
equal to all salvage, subrogation and other recoveries collected on or after
the Inception Date related to claims paid prior to the Inception Date.


 


ARTICLE V


 


ACCOUNTING AND SETTLEMENT


 


5.1.         Accounting
Reports and Payments.  For so long as the Reinsurer acts as
administrator under the Administrative Services Agreement, the Reinsurer shall
provide accounting reports to the Company and pay claims and other amounts
reinsured hereunder with respect to Reinsured Contracts in accordance with the
terms of the Administrative Services Agreement.  In the event that the Reinsurer shall cease to so act as
administrator, the following provisions shall become applicable.


 


5.2.         Amounts
Due the Company.  All amounts due to be paid to the Company
under this Agreement shall be paid by the Reinsurer to the Company or its
administrator in accordance with Section 3.4 no later than three (3) Business
Days after receipt by the Reinsurer of notification by the Company or its
administrator of the amount due to be paid hereunder.


 


5.3.         Quarterly
Reports.  Within ten (10) days of the end of each
calendar quarter that this Agreement remains in effect, the Company shall
supply, directly or through its administrator, the


 


12

















 


Reinsurer with a report that shall provide
financial and other data for such calendar quarter in such form as agreed to by
the parties.  The Company shall pay
concurrent with the delivery of each such report, directly or through its
administrator, all recoveries or payments due to the Reinsurer under Section
2.3(b) and not previously paid to the Reinsurer.


 


5.4.         Best
Efforts to Supply Actual Data.  In preparing all reports required in this
Agreement, the Company shall use, or cause its administrator to use, its best
efforts to supply the actual data.  If
the actual data cannot be supplied with the appropriate report, the Company
shall produce, or cause its administrator to produce, best estimates and shall
provide amended reports based on actual data no more than ten (10) Business
Days after the actual data becomes available.


 


5.5.         Additional
Reports and Updates.  For so long as this Agreement remains in
effect, the Company shall periodically furnish, or cause its administrator to
furnish, to the Reinsurer such other reports and information as may be
reasonably required by the Reinsurer and reasonably available to the Company.


 


ARTICLE VI


 


RESERVES


 


6.1.         Reserves
and Reserve Credits.  The Reinsurer shall establish and maintain
adequate reserves with respect to the Reinsured


 


13

















 


Contracts as are necessary to enable the
Company to take full credit for the reinsurance provided by this Agreement on
its statutory balance sheet filed with the insurance regulatory authorities of
Bermuda; provided that the Reinsurer shall in no event be required to establish
any contingency reserves.


 


ARTICLE VII


 


DURATION AND TERMINATION


 


7.1.         Duration. 
Except as otherwise provided herein, this Agreement shall be unlimited
in duration.


 


7.2.         Termination. 
This Agreement will terminate on the earlier of: (i) the date the
Company’s liability with respect to the Reinsured Contracts are terminated, or
(ii) the date on which the Reinsurer has paid to the Company and/or its
administrator Ultimate Net Loss that, in the aggregate, equals the Aggregate
Limit; provided however, that notwithstanding the foregoing, (x) the obligation
of the Company to pay additional premium pursuant to Section 4.3 shall continue
until all securities owned by the Financing Vehicles have matured or been
liquidated through sale or otherwise and all amounts due the Reinsurer under
this Agreement with respect to the Reinsured Contracts are paid and (y) the
obligation of the Reinsurer to calculate and pay, if any, the C Profit Share
pursuant to Article 8 shall continue.


 


14

















 


ARTICLE
VIII


 


C PROFIT SHARE


 


8.1.         Determination
of Profit Share Within 30
days following the seventh anniversary of the Inception Date (i.e., July 1,
2008), a profit commission (the “C Profit Share”) shall be calculated by the
Reinsurer and such amount, if any, shall be payable to the Company.  The C Profit Share shall be equal to the
product of (a) forty-five million dollars ($45,000,000) minus the sum of (i)
100% of all Litigation Defense Expenses, (ii) those Litigation Losses that the
Reinsurer elects hereunder to fund, in its sole discretion, and (iii) a portion
of all C Profit Share Losses incurred through the seventh anniversary of the
Inception Date under this Agreement, determined in accordance with the
following schedule, times (b) a fraction the denominator of which is the number
of shares of Series C Preference Stock outstanding on the day immediately prior
to the date hereof and the numerator of which is the number of shares of Series
C Preference Stock outstanding on the day of payment of the C Profit Share;
provided, however, that the C Profit Share shall in no event be less than zero.


 


Portion of C Profit Share
Losses subtracted from forty-five million dollars ($45,000,000) in determining
C Profit Share:


 


62.50%
of all C Profit Share Losses up to forty million dollars ($40,000,000) in C
Profit Share Losses,


16.67%
of all C Profit Share Losses in excess of forty million dollars ($40,000,000)
up to one hundred million dollars ($100,000,000) in C Profit Share Losses, and


 


15

















 


100.00%
of all C Profit Share Losses in excess of one hundred million dollars
($100,000,000) up to one hundred ten million dollars ($110,000,000) in C Profit
Share Losses.


 


8.2.         Early
Payment of C Profit Share.  In the event that the Reinsurer should cease
to be a direct or indirect subsidiary of ACE Limited, a Cayman Islands
corporation (“ACE Limited”), and in the further event that the Reinsurer should
fail to assign this Agreement to any direct or indirect subsidiary of ACE Limited
with the Required Rating within 10 Business Days thereafter, the C Profit Share
shall be determined as of the last day of the month following the date that the
Reinsurer ceases to be a direct or indirect subsidiary of ACE Limited, and
shall be payable to the Company within 30 days following such date.


 


8.3.         C
Profit Share Losses.  (a) In determining “C Profit Share Losses”
hereunder, the amount of losses incurred under Reinsured Contracts shall be
determined as follows: (i) for direct insurance or reinsurance written by the
Company (other than Derivative Contracts) covering payment obligations on
securities not owned by or on behalf of the Financing Vehicle(s), C Profit
Share Losses (and case basis reserve practice) will be determined in accordance
with GAAP, (ii) for direct insurance or reinsurance written by the Company
(other than Derivative Contracts) covering payment obligations on securities
owned by or on behalf of the Financing Vehicles including, without limitation,
such securities being at one time owned by or on behalf of a Financing Vehicle
listed in Schedule 4 (a “Repack Financing Vehicle”), C Profit Share Losses will
be determined (a) upon the sale or exchange of the


 


16

















 


security from the Financing Vehicle (other
than a sale to another Financing Vehicle or to an Affiliate of the Reinsurer),
the amount of the C Profit Share Loss will be the difference between the par
amount of the security and the price received upon the sale or exchange or (b)
if there is no sale or exchange of the security or the security has been sold
to another Financing Vehicle or to an Affiliate of the Reinsurer, upon a
determination by the Reinsurer that the value of such security is permanently
impaired, the amount of the C Profit Share Loss will be the difference between
the par amount of the security and the determined value of the security based
on such permanent impairment (including the net present value estimate of
defaulted interest income), and (iii) for Derivative Contracts entered into by
the Company, C Profit Share Losses will be recognized in accordance with GAAP
(including market value losses of securities delivered against payment in
settlement of such Derivative Contracts, as and when settled). Allocated Loss
Adjustment Expenses for purposes of determining C Profit Share Losses shall
consist of actual expenses incurred and liabilities expected to be incurred
either with respect to Reinsurance Contracts or with respect to loss amounts
determined under clauses (i) through (iii) of this Section 8.3(a) in accordance
with GAAP.  For purposes of clause
(ii)(a) of this Section 8.3(a), the amount of any gains realized (i.e., the
amount by which proceeds exceed the par amount) on the sale or exchange of
securities shall be used to offset C Profit Share Losses, if any, to the extent
of such gains.  For


 


17

















 


purposes of calculating C Profit Share
Losses, the amount of losses and Allocated Loss Adjustment Expenses incurred
under the Reinsured Contracts shall be reduced by (x) the amount of any
additional reinsurance premium received by the Reinsurer under Section 4.3(ii)
related to Commercial Financial Services, Inc. (“CFS”) and securities serviced
by CFS, and (y) the amount (if any and subject to a maximum amount of one
hundred thousand dollars ($100,000)) by which two hundred fifty thousand
dollars ($250,000) exceeds the aggregate amount of Litigation Defense Expenses
related to the Egler Litigation plus any monetary settlement(s) or final,
non-appealable monetary judgment(s) rendered against CGA, CGAIM or the Company
related to the Egler Litigation.]


 


(b)           The Company and the Reinsurer agree that any
dispute between the Company and the Reinsurer arising out of the calculation by
Reinsurer of the C Profit Share Losses under clause (i) of Section 8.3(a),
under clause (ii)(b) of Section 8.3(a) or under clause (iii) of Section 8.3(a)
to the extent derivative transactions have not been settled, shall be
submitted, through written summaries prepared by the Company and Reinsurer to
an independent accounting firm of internationally recognized standing
reasonably satisfactory to the Company and the Reinsurer (the “Third party
Accountants”). The Third Party Accountants shall act as experts and not as
arbitrators to determine the resolution, based on GAAP, of those issues (and
only those issues) in dispute; provided, however, that the dollar
amount of


 


18

















 


each item in dispute shall be determined
within the range of dollar amounts proposed by the Company, on the one hand,
and the Reinsurer, on the other hand. 
The Third Party Accountants’ determination shall be made as promptly as
practicable after the submission of the dispute by the Company and the
Reinsurer, shall be set forth in a written statement delivered to the Company
and the Reinsurer and shall be final, binding and conclusive on the
parties.  Each party agrees to execute,
if requested by the Third Party Accountants, a reasonable engagement
letter.  All fees and expenses relating
to the work, if any, to be performed by the Third Party Accountants shall be
allocated to the Company and the Reinsurer as assessed by the Third Party
Accountants.  Notwithstanding anything
in this Agreement to the contrary, the Company and the Reinsurer agree that
calculation by the Reinsurer of C Profit Share Losses under clause (ii)(a) of
Section 8.3(a), or under clause (iii) of Section 8.3(a) to the extent that
derivative transactions have been settled, shall be final and binding on the
Company and shall not be subject to the dispute resolution mechanism described
above in this Section 8.3(b) or arbitration under Article X hereof.


 


ARTICLE IX


 


INSOLVENCY


 


9.1.         Payments.  In
the event of the insolvency of the Company, all payments due the Company under
this Agreement shall be


 


19

















payable by the Reinsurer directly to the
Company or to its liquidator, receiver, conservator or statutory successor on
the basis of the liability of the Company under the policy or policies
reinsured, without diminution because of the insolvency of the Company.  It is agreed and understood, however, (i)
that in the event of the insolvency of the Company the Reinsurer shall be given
written notice of the pendency of a claim against the insolvent Company on a
Reinsured Contract within a reasonable time after such claim is filed in the
insolvency proceeding and (ii) that during the pendency of such claim the
Reinsurer may, subject to the obligation of the Reinsurer to make timely
payments of amounts due the Company or its liquidator, receiver, conservator or
statutory successor under this Agreement, investigate such claim and interpose,
at its own expense, in the proceeding where such claim is to be adjudicated any
defenses which it may deem available to the Company or its liquidator, receiver
or statutory successor.


 


9.2.         Expenses.  It is further understood that
any expense thus incurred by the Reinsurer shall be chargeable, subject to court
approval, against the insolvent Company as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer.  Where two or more assuming reinsurers are
involved in the same claim and a majority in interest elect to interpose
defenses to such claim, the expense shall be apportioned in accordance


 


20

















 


with the terms of this Agreement as though
such expense had been incurred by the Company.


 


ARTICLE X


 


ARBITRATION


 


10.1.       Resolution
of Damages.  Any dispute between the Company and the
Reinsurer arising out of the provisions of this Agreement or concerning its
interpretation or validity (other than any dispute arising out of the
calculation by the Reinsurer of the C Profit Share Losses), whether arising
before or after termination of this Agreement, shall be submitted to
arbitration in the manner set forth in this Article X.  Either party may initiate arbitration of any
such dispute by giving written notice to the other party of its intention to
arbitrate and of its appointment of an arbitrator in accordance with Section
10.3.


 


10.2.       Composition
of Panel.  Unless the parties agree upon a single arbitrator
within fifteen (15) days after the receipt of notice of intention to arbitrate,
all disputes shall be submitted to an arbitration panel composed of two
arbitrators and an umpire, chosen in accordance with Sections 10.3 and 10.4.


 


10.3.       Appointment
of Arbitrators.  The party requesting arbitration
(hereinafter referred to as the “claimant”) shall appoint an arbitrator and
give written notice thereof to the other party (hereinafter referred to as the
“respondent”) together with its notice


 


21

















 


of intention to arbitrate.  Unless a single arbitrator is agreed upon
within fifteen (15) days after the receipt of the notice of intention to
arbitrate, the respondent shall, within thirty (30) days after receiving such
notice, also appoint an arbitrator and notify the claimant thereof.  Before instituting a hearing, the two
arbitrators so appointed shall choose an umpire.  If, within twenty (20) days after they are both appointed, the
arbitrators fail to agree upon the appointment of an umpire, the umpire shall
be appointed by the President of the American Arbitration Association.  All members of the arbitration panel shall
be active or former insurance or reinsurance executives having relevant
knowledge of the matters in dispute, and shall be impartial third parties
without past employment or directorial relations with the parties to the
arbitration and their parents and/or Affiliates.


 


10.4.       Failure
of a Party to Appoint Arbitrator.  If the respondent fails to
appoint an arbitrator within thirty (30) days after receiving a notice of
intention to arbitrate, such arbitrator shall be appointed by the President of
the American Arbitration Association, and shall then, together with the
arbitrator appointed by the claimant, choose an umpire as provided in Section
10.3.


 


10.5.       Involvement
of Other Reinsurers.  If the Company is involved in a dispute
under the terms of this Agreement and in one or more separate disputes with one
or more other reinsurers in which common questions of law or fact are in issue,
the Company or the


 


22

















 


Reinsurer, at their option, may join with
such other reinsurer in a common arbitration proceeding under the terms of this
Article X. If the Company and such other reinsurers have commenced arbitration,
the Reinsurer may at its option join such proceeding for the determination of
the dispute between the Company and the Reinsurer.


 


10.6.       Choice
of Forum.  Any arbitration instituted pursuant to this
Article X shall be held in New York, New York.


 


10.7.       Submission
of Dispute to Panel.  Unless otherwise extended by the arbitration
panel, or agreed to by the parties, each party shall submit its case to the
panel within thirty (30) days after the selection of an umpire.


 


10.8.       Procedure
Governing Arbitration.  All proceedings before the panel shall be
informal and the panel shall not be bound by the formal rules of evidence.  The panel shall have the power to fix all
procedural rules relating to the arbitration proceeding.  In reaching any decision, the panel shall
give due consideration to the custom and usage of the insurance and reinsurance
business.


 


10.9.       Arbitration
Award.  The arbitration panel shall render its
decision within sixty (60) days after termination of the proceeding, which
decision shall be in writing, stating the reason therefor.  The decision of the majority of the panel
shall be final and binding on the parties to the proceeding.


 


10.10.     Cost of
Arbitration.  All fees and expenses of the arbitration,
including the fees and expenses of each arbitrator and the


 


23

















 


umpire, shall be allocated to the Company and
the Reinsurer as assessed by the panel.


 


10.11.     Limit
of Jurisdiction.  The arbitration panel does not have the
jurisdiction to authorize any punitive damage awards between the parties.


 


ARTICLE XI


 


EXCLUSIONS


 


11.1.       Noncontractual Damages. 
This Agreement does not cover Noncontractual Damages. “Noncontractual
Damages” as used herein shall mean those liabilities arising from actual or
alleged misconduct of the Company or of its Affiliates, or their agents,
brokers, or representatives (other than the Reinsurer) in their handling of
claims or losses, or in any of their dealings with their insureds or any other
person.  Such liabilities shall include,
but are not limited to, punitive, exemplary, compensatory, and consequential
damages.  Such misconduct shall include,
but is not limited to, failure to settle within the policy limit, negligence, fraud
or bad faith in rejecting an offer of settlement or in the preparation of the
defense or in the trial of any action or in the preparation or prosecution of
any appeal consequent upon any action. 
Notwithstanding the foregoing, Noncontractual Damages shall not include,
and this Agreement shall cover, any and all amounts otherwise included in the
definition of Ultimate Net Loss that the Company actually pays or is obligated
to pay


 


24

















 


to ceding companies under Reinsured Contracts
that are agreements of assumed reinsurance, whether under the terms of such
Reinsured Contracts or as a result of agreements between the Company and
cedents as to the settlement of specific claims.


 


11.2.       Insolvency
Funds.  The Reinsurer shall not be obligated to pay
to the Company any share of any liability of the Company arising, by contract,
operation of law, or otherwise, from participation or membership of the Company
or any of its Affiliates, whether voluntary or involuntary, in any Insolvency
Fund or for reimbursement of any Person for any such liability. “Insolvency
Fund” includes any government mandated guaranty or insolvency fund, plan, pool,
association, or other arrangement howsoever denominated, established or governed,
which provides for any assessment of or payment or assumption by any person of
part or all of any claim, debt, charge, fee, or other obligation of any
insurer, or its successors or assigns which has been declared to be insolvent,
or which is otherwise deemed unable to meet any claim, debt, charge, fee or
other obligations in whole or in part.


 


ARTICLE XII


 


MISCELLANEOUS PROVISIONS


 


12.1.       Headings
and Schedules.  Headings used herein are not a part of this
Agreement and shall not affect the terms hereof.  The attached Schedules and Exhibit are a part of this Agreement.


 


25

















 


12.2.       Notices.  Any notice required or
permitted hereunder shall be in writing and shall be (i) delivered personally
(by courier or otherwise), (ii) sent by facsimile transmission with
confirmation of receipt and with subsequent personal delivery or express
delivery of the original notice, (iii) transmitted by electronic mail with
confirmation of receipt and with subsequent personal delivery or express
delivery of the original notice or (iv) sent by express delivery.  Any such notice shall be deemed given when
so delivered, sent or transmitted, as follows:


 


If to the Company:


 


Commercial Guaranty
Assurance, Ltd.


Craig Appin House


8 Wesley Street


Hamilton HM 11


Bermuda


Attention:  President


Telephone No.:  441-296-5144


Telecopier No.:  441-296-5145


Email:  liz@cga.bm


 


If to the Reinsurer:


 


ACE Capital Re Overseas Ltd.


11 Victoria Hall


Victoria Street


P.O. Box 1826


Hamilton HM HX


Bermuda


Attention:  Corporate Secretary


Telephone No.:  441-297-9730


Telecopier No.:  441-297-9704


Email:  rebecca.carne@marshmc.com


 


26

















 


With a copy to:


 


ACE Capital Re Inc.


1325 Avenue of the Americas


New York, NY  10019


Attention:  General Counsel


Telephone No.:  212-974-0100


Telecopier No.:  212-581-3268


Email:  nbregman@acecapitalre.com


 


12.3.       Successors
and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
permitted assigns and legal representatives. 
Neither this Agreement, nor any right hereunder, may be assigned by
either party without the prior written consent of the other party hereto;
provided that the Reinsurer may assign this Agreement without the prior written
consent of the Company (a) if the Reinsurer ceases to be a subsidiary of ACE
Limited, to any Person which has the Required Rating, (b) if any of the
Reinsurer’s ratings shall have been downgraded one full rating category from its
ratings as of the date of this Agreement, to any Person which has the Required
Rating or (c) to any Person which has a rating of AA or higher from Standard
& Poor’s (or an equivalent rating from another nationally recognized rating
agency).


 


12.4.       Execution
in Counterpart.  This Agreement may be executed by the
parties hereto in any number of counterparts, and by each of the parties hereto
in separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an


 


27

















 


original, but all such counterparts shall
together constitute but one and the same instrument.


 


12.5.       Currency. 
Whenever the word “dollars” or the “$” sign appear in this Agreement,
they shall be construed to mean United States Dollars, and all transactions
under this Agreement shall be in United States Dollars.


 


12.6.       Amendments. 
This Agreement may not be changed, altered or modified unless the same
shall be in writing executed by the Company and the Reinsurer.


 


12.7.       Governing
Law.  This Agreement shall be interpreted and
governed by the laws of Bermuda without regard to its rules with respect to
conflicts of law.


 


12.8.       Integration. 
This Agreement and the Administrative Services Agreement constitute the
entire agreement between the parties hereto relating to the subject matter
hereof and supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written, of the parties and there
are no general or specific warranties, representations or other agreements by
or among the parties in connection with the entering into of this Agreement or
the subject matter hereof except as specifically set forth or contemplated
herein.


 


12.9.       No
Waiver.  No consent or waiver, express or implied, by
any party to or of any breach or default by any other party in the performance
by such other party of its obligations hereunder shall be


 


28

















 


deemed or construed to be a consent or waiver
to or of any other breach or default in the performance of obligations
hereunder by such other party hereunder. 
Failure on the part of any party to complain of any act or failure to
act of any other party or to declare any other party in default, irrespective
of how long such failure continues, shall not constitute a waiver by such first
party of any of its rights hereunder.


 


12.10.     Related
Person Insurance Income.  (a) The Company represents that to the best
of its knowledge: (i) it does not own, directly or indirectly, any shares of
ACE Limited, (ii) no Person that controls the Company through direct or
indirect ownership of fifty (50) percent or more (by vote or value) of the
capital stock of the Company owns any shares of ACE Limited, and (iii) no
Person that is controlled by the Company through direct or indirect ownership
of fifty (50) percent or more (by vote or value) of the capital stock of that
Person (“Controlled Person”) owns any shares of ACE Limited.  (b) The Company agrees that, during the term
of this Agreement, it will not knowingly purchase, and to the extent reasonably
practicable, it will not permit any Controlled Person to purchase any shares of
ACE Limited.


 


29

















 


IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in Hamilton, Bermuda by their duly authorized
representatives.


 


 


	
   

  	
  COMMERCIAL GUARANTY ASSURANCE, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael Miran

  	
   

  
	
   

  	
  Title:

  	
  President

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE CAPITAL RE OVERSEAS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rebecca L. Carne

  	
   

  
	
   

  	
  Title:

  	
  Director

  	
   

  
					



 


30

















 


Schedule 1


 


Ceded
Reinsurance Agreements


 


1.             Facultative Reinsurance Agreement between
Commercial Guaranty Assurance, Ltd. and ACE Capital Re Overseas Ltd. (formerly
named KRE Reinsurance Ltd.), effective as of January 1, 1998.


 


2.             Quota Share Reinsurance Agreement, dated as
of October 28, 1998 between Commercial Guaranty Assurance, Ltd. and ACE Capital
Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), with respect to
Financial Guaranty Insurance Policy Number 981022A.


 


3.             Quota Share Reinsurance Agreement, dated as
of October 28, 1998 between Commercial Guaranty Assurance, Ltd. and ACE Capital
Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), with respect to
Financial Guaranty Insurance Policy Number 981022B.


 


4.             Quota Share Reinsurance Agreement, dated as
of October 28, 1998 between Commercial Guaranty Assurance, Ltd. and ACE Capital
Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), with respect to
Financial Guaranty Insurance Policy Number 981022C.


 


5.             Quota Share Reinsurance Agreement, dated as
of October 28, 1998 between Commercial Guaranty Assurance, Ltd. and ACE Capital
Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), with respect to
Financial Guaranty Insurance Policy Number 981022D.


 


6.             Quota Share Reinsurance Agreement, dated as
of October 28, 1998 between Commercial Guaranty Assurance, Ltd. and ACE Capital
Re Overseas Ltd. (formerly named KRE Reinsurance Ltd.), with respect to
Financial Guaranty Insurance Policy Number 981022E.


 

















 


Schedule 2


 


Financing
Vehicles


 


1.             Butler Trust, a Delaware business trust.


 


2.             Cobalt Capital, LLC, a Delaware limited
liability company.


 


3.             Cobalt Holdings, LLC, a Delaware limited
liability company.


 


4.             GFC Cobalt, LLC, a Delaware limited liability
company.


 


5.             GFC St. George, Ltd., an exempted Cayman
Islands limited liability company.


 


6.             Guaranteed Finance Company, Ltd., a Bermuda
company.


 


7.             Guaranteed Residential Securities Trust,
Series 1998-1, a Delaware business trust.


 


8.             Guaranteed Residential Securities Trust,
Series 1999-A, a Delaware business trust.


 


9.             Newport Trust, a Delaware business trust.


 


10.           NW Funding, LLC, a Nevada limited liability company.


 


11.           St. George CDO Funding I Ltd., an exempted Cayman Islands limited
liability company.


 


12.           St. George CDO Funding I (Delaware) Corp., a Delaware corporation.


 


13.           St. George Funding 2000-1, Limited, an exempted Cayman Islands limited
liability company.


 


14.           St. George Holdings, Ltd., an exempted Cayman Islands limited liability
company.


 


15.           St. George Investments I, Ltd., an exempted Cayman Islands limited
liability company.


 


16.           St. George Investments II, Ltd., an exempted Cayman Islands limited
liability company.


 


17.           St. George Investments III, Ltd., an exempted Cayman Islands limited
liability company.


 

















 


18.           St. George Residential Funding, Ltd., an exempted Cayman Islands
limited liability company.


 

















 


Schedule 3


 


Reserves


 


$250,000 for Egler Litigation


 

















 


Schedule 4


 


Repack
Financing Vehicles


 


St. George CDO Funding 1 Ltd.


Guaranteed Residential Securities Trust,
Series 1998-1


Guaranteed Residential Securities Trust,
Series 1999-A


St. George Funding 2000-1, Limited


Butler Trust


Newport Trust


 

















 


EXHIBIT A


 


ADMINISTRATIVE SERVICES AGREEMENT


 


 


COMMERCIAL GUARANTY ASSURANCE, LTD.


 


and


 


ACE CAPITAL RE OVERSEAS LTD.


 


 


Dated as of July 18, 2001


 

















 


ADMINISTRATIVE SERVICES AGREEMENT


 


This ADMINISTRATIVE SERVICES
AGREEMENT (this “Agreement”), dated as of July 18, 2001, is entered into by and
between Commercial Guaranty Assurance, Ltd., a company with limited liability
organized under the laws of Bermuda (the “Company”), and ACE Capital Re
Overseas Ltd., a company with limited liability organized under the laws of
Bermuda (the “Administrator”).


 


RECITALS


 


WHEREAS, the Company and the
Administrator have entered into an Aggregate Loss Portfolio Reinsurance
Agreement dated as of the date hereof (the “Reinsurance Agreement”) whereby the
Company has agreed to cede and the Administrator has agreed to reinsure, on an
indemnity reinsurance basis, certain losses of the Company under the Reinsured
Contracts (capitalized terms used herein and not defined herein, unless
otherwise indicated, have the respective meanings assigned to them in the Reinsurance
Agreement); and


 


WHEREAS, the Company desires
that the Administrator perform certain administrative functions on behalf of
the Company from and after the date hereof (the “Inception Date”) in connection
with the Reinsurance Agreement and with respect to the Reinsured Contracts, and
the Administrator has agreed to provide such services;


 


NOW, THEREFORE, in consideration
of the foregoing premises, the mutual agreements and covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Administrator hereby agree as
follows:


 


ARTICLE I


 


AUTHORITY


 


The Company hereby appoints the
Administrator, and the Administrator hereby accepts appointment, to provide as
an independent contractor of the Company such administrative and other services
with respect to the Reinsurance Agreement and the Reinsured Contracts as set
forth in this Agreement (the “Administrative Services”), all on the terms, and
subject to the limitations and conditions, as set forth in this Agreement.


 


ARTICLE II


 


STANDARD FOR SERVICES


 


All of the Administrative
Services described in this Agreement shall be performed by the Administrator in
accordance with (i) applicable law, (ii) the Reinsured Contracts and (iii) the
Administrator’s own standards in providing services with respect to contracts
issued by the Administrator in its own name that are similar to the Reinsured
Contracts.


 

















 


ARTICLE III


 


NOTIFICATION TO CONTRACTHOLDERS


 


The Administrator agrees to send
to the holders of Reinsured Contracts (the “Contractholders”) a written notice
prepared by the Administrator and reasonably acceptable to the Company to the
effect that the Administrator has been appointed by the Company to provide
Administrative Services.  The
Administrator shall send such notice by mail at a time reasonably acceptable to
the Company and the Administrator.


 


ARTICLE IV


 


CLAIMS HANDLING


 


The Administrative Services with
respect to claims for loss payments shall include the following:


 


4.1. Claim Administration
Services.  The Administrator shall
acknowledge, consider, review, investigate, deny, settle, pay or otherwise
dispose of each claim for losses reported under a Reinsured Contract (each a
“Claim” and collectively the “Claims”). 
The Administrator shall pay Claims and associated expenses under the
Reinsured Contracts to the extent that the Company provides it with funds
sufficient to make such payments or the Administrator collects, on behalf of
the Company, amounts due under the Ceded Reinsurance Agreements, the Affiliate
Reinsurance Agreement or the Reinsurance Agreement; provided that the
Administrator may, in its sole discretion, advance its own funds, such advances
to be reimbursed from the collection of amounts due the Company under the Ceded
Reinsurance Agreements, the Affiliate Reinsurance Agreement or the Reinsurance
Agreement.  In the event of the
insolvency of the Company, the Administrator shall continue to make timely
payments of Claims and associated expenses in accordance with the provisions
set forth above, except as otherwise required under applicable law in any
insolvency proceeding with respect to the Company.


 


4.2. Mitigation of Loss.  The Administrator shall have full authority
to seek recoveries with respect to Claims and to participate on behalf of the
Company in any financial restructuring of transactions which resulted in
Claims, to the extent that it determines the losses could be minimized by doing
so.  In addition, the Administrator
shall have full authority to act on behalf of the Company in the exercise of
the rights and remedies of the Company under the Reinsured Contracts, including
the right to direct the sale of underlying securities.


 


4.3. Legal Proceedings.  In the event that the Administrator receives
notice after the date hereof of any lawsuit, arbitration or other dispute
resolution proceedings related to Claims that involve any alleged liabilities
under a Reinsured Contract (a “Legal Proceeding”), the Administrator shall
deliver to the Company a written notice with respect thereto.  The Administrator shall monitor and control
all Legal Proceedings, including the defense, settlement or withdrawal of any
such Legal Proceedings in its absolute discretion, with its own counsel at its
own expense.


 


2

















 


ARTICLE V


 


UNDERWRITING


 


Administrator shall assume all
responsibility for all underwriting necessary or appropriate with respect to
the issuance of new Reinsured Contracts necessary or desirable to facilitate
the run-off of the existing business of the Company, and for processing of
underwriting-related transactions including but not limited to the processing
of applications and the issuance of Reinsured Contracts.


 


ARTICLE VI


 


BILLINGS AND COLLECTIONS


 


On the Inception Date, the
Administrator shall assume all responsibility for billing and collecting
premiums and other amounts due under the Reinsured Contracts payable on or
after such date.  The risk of loss,
theft or destruction of premium with respect to the Reinsured Contracts shall
be borne solely by the Administrator.


 


ARTICLE VII


 


REGULATORY REPORTING


 


The Administrator shall timely
provide to the Company such informational reports and summaries including
statistical summaries regarding the services provided by the Administrator
hereunder as are necessary or useful to allow the Company to satisfy any
requirements (financial reporting or otherwise) (i) imposed by any insurance
regulatory authority upon the Company with respect to the Reinsured Contracts, (ii)
required under the Reinsurance Agreement or the Affiliate Reinsurance
Agreement, or (iii) required by applicable rating agencies.  In addition, the Administrator, upon the
reasonable request of the Company, shall promptly provide to the Company copies
of all existing records maintained by the Administrator relating to the
Reinsured Contracts (including, with respect to records maintained in machine
readable form, hard copies) that are necessary to satisfy such requirements.


 


ARTICLE VIII


 


MISCELLANEOUS ADMINISTRATIVE SERVICES


 


On the Inception Date, the
Administrator shall assume the obligations set forth below:


 


(i)            The
Administrator shall timely pay all reinsurance premiums due to reinsurers under
the Ceded Reinsurance Agreements with respect to the Reinsured Contracts.


 


(ii)           The Administrator shall collect
from reinsurers all reinsurance recoveries due under the Ceded Reinsurance
Agreements, the Affiliate Reinsurance Agreement and the Reinsurance Agreement
and shall collect all other recoveries and subrogation amounts under the
Reinsured Contracts.


 


3

















 


(iii)          From and after the Inception
Date, the Company does hereby by these presents appoint and name the
Administrator, acting through its duly appointed officers, the Company’s lawful
attorney-in-fact for it, and in its name, place and stead, to act for the
Company with respect to any and all letters of credit and trust funds
outstanding for the benefit of the Company pursuant to the Affiliate
Reinsurance Agreement or the terms of any of the Ceded Reinsurance Agreements.


 


(iv)          The Administrator shall timely
pay to the reinsurers under the Affiliate Reinsurance Agreement and the
Reinsurance Agreement all premiums and recoveries and subrogation amounts due
to such reinsurers under the terms of such Agreements.


 


ARTICLE IX


 


MAINTENANCE OF RECORDS


 


On or before the Inception Date,
the Company shall deliver to the Administrator copies of all records required
by the Administrator in order for the Administrator to perform its obligations
under this Agreement.  On the Inception
Date, the Administrator shall assume responsibility for maintaining records
under the Reinsured Contracts concerning underwriting, billing and collection,
accounting and reporting and any other category of Administrative Services.


 


ARTICLE X


 


COOPERATION BY THE COMPANY


 


The Company shall cooperate to
the extent reasonably possible with the Administrator and execute and provide
such additional documentation as may become necessary or appropriate to enable
the Administrator to fully carry out its responsibilities under this Agreement
and to effectuate the intention of the parties under the Reinsurance Agreement
and this Agreement.


 


ARTICLE XI


 


ACCESS TO RECORDS


 


Upon advance written notice,
each party, by its duly appointed representatives, shall have the right at any
reasonable time, prior to or after the termination of this Agreement, to audit,
examine and copy all records in the possession of the other party relating to
the Reinsured Contracts.  Such audit and
examination shall occur at the non-auditing party’s place of business during
normal business hours.


 


4

















 


ARTICLE XII


 


CONSIDERATION FOR ADMINISTRATIVE
SERVICES


 


Except as otherwise provided in
Article IV, apart from the performance by the Company of its obligations under
the Reinsurance Agreement, there shall be no fee or other consideration due to
the Administrator for performance of the Administrative Services under this
Agreement.


 


ARTICLE XIII


 


INDEMNIFICATION


 


13.1.        Indemnification.  (a) Administrator agrees to indemnify and
hold harmless the Company and any of its shareholders, directors, officers,
employees, agents or affiliates (and the shareholders, directors, officers,
employees and agents of such affiliates) from any and all losses, liabilities,
costs, claims, demands, compensatory, extra contractual and/or punitive
damages, fines, penalties and expenses (including reasonable attorneys’ fees
and expenses) (collectively, “Company Losses”) arising out of or caused by any
actual or alleged: (i) fraud, theft or embezzlement by officers, employees or
agents of Administrator during the term of this Agreement; (ii) failure, either
intentional or unintentional, of Administrator to properly perform the services
or take the actions required by this Agreement, including, without limitation,
the failure to properly process, evaluate and pay Claims in accordance with the
terms of this Agreement; (iii) other act of gross negligence or willful
misconduct committed by officers, agents or employees of Administrator during
the term of this Agreement; (iv) action or inaction of Administrator when
acting on behalf of the Company hereunder which results in Noncontractual
Damages (under the Reinsurance Agreement or the Affiliate Reinsurance
Agreement); or (v) failure of Administrator to comply with applicable laws,
rules and regulations during the term of this Agreement.


 


(b)           The
Company agrees to indemnify and hold harmless Administrator and any of its
shareholders, directors, officers, employees, agents or affiliates (and the
shareholders, directors, officers, employees and agents of such affiliates)
from any and all losses, liabilities, costs, claims, demands, compensatory,
extra contractual and/or punitive damages, fines, penalties and expenses
(including reasonable attorneys’ fees and expenses) (collectively,
“Administrator Losses”) arising out of or caused by any actual or alleged: (i)
fraud, theft or embezzlement by officers, employees or agents (other than Administrator,
its affiliates or any of the officers, employees or agents of the Administrator
or its affiliates) of the Company during the term of this Agreement; (ii) other
act of gross negligence or willful misconduct committed by officers, employees
or agents (other than Administrator, its affiliates or any of the officers,
employees or agents of the Administrator or its affiliates) of the Company
during the term of this Agreement; or (iii) failure of the Company to comply
with applicable laws, rules and regulations during the term of this Agreement
other than any failure on the part of the Company or Administrator caused by
the action or inaction of Administrator, including when acting in the name or
on behalf of the Company, whether or not in compliance with the terms of this
Agreement.


 


5

















 


13.2.        Notice of Asserted Liability.  In the event that either party hereto
asserts a claim for indemnification hereunder, such party seeking
indemnification (the “Indemnified Party”) shall give written notice to the
other party (the “Indemnifying Party”) specifying the facts constituting the
basis for, and the amount (if known) of, the claim asserted.


 


13.3.        Right to Contest Claims of Third
Parties.  (a) If an
Indemnified Party asserts, or may in the future seek to assert, a claim for
indemnification hereunder because of a claim or demand made, or an action,
proceeding or investigation instituted, by any person not a party to this
Agreement (a “Third Party Claimant”) that may result in an Administrator Loss
with respect to which Administrator is entitled to indemnification pursuant to
Section 13.l(b) hereof or a Company Loss with respect to which the Company is
entitled to indemnification pursuant to Section 13.l(a) hereof (an “Asserted
Liability”), the Indemnified Party shall so notify the Indemnifying Party as
promptly as practicable, but in no event later than 10 Business Days after such
Asserted Liability is actually known to the Indemnified Party.  Failure to deliver notice with respect to an
Asserted Liability in a timely manner shall not be deemed a waiver of the
Indemnified Party’s right to indemnification for losses in connection with such
Asserted Liability but the amount of reimbursement to which the Indemnified Party
is entitled shall be reduced by the amount, if any, by which the Indemnified
Party’s losses would have been less had such notice been timely delivered.


 


(b)           The
Indemnifying Party shall have the right, upon written notice to the Indemnified
Party, to investigate, contest, defend or settle the Asserted Liability; provided
that the Indemnified Party may, at its option and at its own expense,
participate in the investigation, contesting, defense or settlement of any such
Asserted Liability through representatives and counsel of its own
choosing.  The failure of the
Indemnifying Party to respond in writing to proper notice of an Asserted
Liability within 10 Business Days after receipt thereof shall be deemed an
election not to defend the same.  Unless
and until the Indemnifying Party elects to defend the Asserted Liability, the
Indemnified Party shall have the right, at its option and at the Indemnifying
Party’s expense, to do so in such manner as it deems appropriate, including,
but not limited to, settling such Asserted Liability (after giving notice of
the settlement to the Indemnifying Party) on such terms as the Indemnified
Party deems appropriate.


 


(c)           Except
as provided in the immediately preceding sentence, the Indemnified Party shall
not settle or compromise any Asserted Liability for which it seeks
indemnification hereunder without the prior written consent of the Indemnifying
Party (which shall not be unreasonably withheld) during the 10-day period
specified above.


 


(d)           The
Indemnifying Party shall be entitled to participate in (but not to control) the
defense of any Asserted Liability which it has elected, or is deemed to have
elected, not to defend, with its own counsel and at its own expense.


 


(e)           Except
as provided in the first sentence of paragraph (b) of this Section 13.3, the
Indemnifying Party shall bear all costs of defending any Asserted Liability and
shall indemnify and hold the Indemnified Party harmless against and from all
costs, fees and expenses incurred in connection with defending such Asserted
Liability.


 


6

















 


(f)            Administrator
and the Company shall make mutually available to each other all relevant
information in their possession relating to any Asserted Liability (except to
the extent that such action would result in a loss of attorney-client
privilege) and shall cooperate with each other in the defense thereof.


 


13.4.        Indemnification Payments.  Any payment hereunder shall be made by wire
transfer of immediately available funds to such account or accounts as the
Indemnified Party shall designate to the Indemnifying Party in writing.


 


13.5.        Survival.  The provisions of this Article XIII shall
survive the termination of this Agreement.


 


ARTICLE XIV


 


ARBITRATION


 


14.1.        Resolution of Damages.  Any dispute between the Company and the
Administrator arising out of the provisions of this Agreement, or concerning
its interpretation or validity, whether arising before or after termination of
this Agreement, shall be submitted to arbitration in the manner set forth in
this Article XIV.  Either party may
initiate arbitration of any such dispute by giving written notice to the other
party of its intention to arbitrate and of its appointment of an arbitrator in
accordance with Section 14.3.


 


14.2.        Composition of Panel.  Unless the parties agree upon a single
arbitrator within fifteen (15) days after the receipt of notice of intention to
arbitrate, all disputes shall be submitted to an arbitration panel composed of
two arbitrators and an umpire, chosen in accordance with Sections 14.3 and
14.4.


 


14.3.        Appointment of Arbitrators.  The party requesting arbitration
(hereinafter referred to as the “claimant”) shall appoint an arbitrator and
give written notice thereof to the other party (hereinafter referred to as the
“respondent”) together with its notice of intention to arbitrate.  Unless a single arbitrator is agreed upon
within fifteen (15) days after the receipt of the notice of intention to
arbitrate, the respondent shall, within thirty (30) days after receiving such
notice, also appoint an arbitrator and notify the claimant thereof.  Before instituting a hearing, the two
arbitrators so appointed shall choose an umpire.  If, within twenty (20) days after they are both appointed, the
arbitrators fail to agree upon the appointment of an umpire, the umpire shall
be appointed by the President of the American Arbitration Association.  All members of the arbitration panel shall
be active or former insurance or reinsurance executives having relevant
knowledge of the matters in dispute, and shall be impartial third parties
without past employment or directorial relations with the parties to the
arbitration and their parents and/or Affiliates.


 


14.4.        Failure of a Party to Appoint
Arbitrator.  If the respondent
fails to appoint an arbitrator within thirty (30) days after receiving a notice
of intention to arbitrate, such arbitrator shall be appointed by the President
of the American Arbitration Association, and shall then, together with the
arbitrator appointed by the claimant, choose an umpire as provided in Section
14.3.


 


7

















 


14.5.        Choice of Forum.  Any arbitration instituted pursuant to this
Article XIV shall be held in New York, New York.


 


14.6.        Submission of Dispute to Panel.  Unless otherwise extended by the arbitration
panel, or agreed to by the parties, each party shall submit its case to the
panel within thirty (30) days after the selection of an umpire.


 


14.7.        Procedure Governing Arbitration.  All proceedings before the panel shall be
informal and the panel shall not be bound by the formal rules of evidence.  The panel shall have the power to fix all
procedural rules relating to the arbitration proceeding.  In reaching any decision, the panel shall
give due consideration to the custom and usage of the insurance and reinsurance
business.


 


14.8.        Arbitration Award.  The arbitration panel shall render its
decision within sixty (60) days after termination of the proceeding, which
decision shall be in writing, stating the reason therefor.  The decision of the majority of the panel
shall be final and binding on the parties to the proceeding.


 


14.9.        Cost of Arbitration.  All fees and expenses of the arbitration,
including the fees and expenses of each arbitrator and the umpire, shall be
allocated to the Company and the Administrator as assessed by the panel.


 


14.10.      Limit
of Jurisdiction.  The arbitration
panel does not have the jurisdiction to authorize any punitive damage awards
between the parties.


 


ARTICLE XV


 


DURATION; TERMINATION


 


15.1.        Duration.  This Agreement shall commence on the date of
its execution and continue with respect to each Reinsured Contract until no
further Administrative Services in respect of such Reinsured Contract is
required, unless it is earlier terminated under Section 15.2.


 


15.2.        Termination.  (a) This Agreement is subject to immediate
termination at the option of the Company, upon written notice to the
Administrator, in the event that a voluntary or involuntary proceeding is
commenced in any state by or against the Administrator for the purpose of
conserving, rehabilitating or liquidating the Administrator, or the
Administrator shall lose its authority to perform services hereunder and, in
either event, this Agreement is not promptly assigned by the Administrator to
an affiliate of Administrator pursuant to Section 16.5.


 


(b)           This
Agreement may be terminated at any time upon the mutual written consent of the
parties hereto, which writing shall state the effective date of termination.


 


(c)           In the
event that this Agreement is terminated under any of the provisions of Section
15.2(a), the Administrator shall select a third-party administrator to perform
the services required by this Agreement. 
The Company shall have the right to approve any such third-party
administrator selected by the Administrator, but such approval will not
unreasonably be withheld.  If the
Administrator fails to select a third-party administrator pursuant to this
Section 15.2(c),


 


8

















 


the
Company shall select such a third-party administrator.  In either case, the Administrator shall pay
all fees and charges imposed by the selected third-party administrator and the
reasonable costs of the Company in the transition of the performance of the
services required under this Agreement to such third-party administrator.


 


(d)           In the
event that this Agreement is terminated, the Administrator shall cooperate
fully in the transfer of services and the books and records maintained by the
Administrator pursuant to this Agreement (or, where appropriate, copies
thereof) to the third-party administrator selected pursuant to Section 15.2(c)
(in the event that this Agreement is terminated under Section 15.2(a)) or to
the Company (in the event that this Agreement is terminated pursuant to the
provisions of Section 15.2(b)), so that such third-party administrator or the
Company, as the case may be, will be able to perform the services required
under this Agreement without interruption following termination of this
Agreement.


 


ARTICLE XVI


 


MISCELLANEOUS PROVISIONS


 


16.1.        Notices.  Any notice required or permitted hereunder
shall be in writing and shall be (i) delivered personally (by courier or
otherwise), (ii) sent by facsimile transmission with confirmation of receipt
and with subsequent personal delivery or express delivery of the original
notice, (iii) transmitted by electronic mail with confirmation of receipt and
with subsequent personal delivery or express delivery of the original notice or
(iv) sent by express delivery.  Any such
notice shall be deemed given when so delivered, sent or transmitted, as
follows:


 


(1)           If to
the Company to:


 


Commercial
Guaranty Assurance, Ltd.


Craig
Appin House


8
Wesley Street


Hamilton
HM 11


Bermuda


Attention:  President


Telephone
No.:  441-296-5144


Telecopier
No.:  441-296-5145


Email:  liz@cga.bm


 


9

















 


(2)           If to
the Administrator to:


 


ACE
Capital Re Overseas Ltd.


11
Victoria Hall


Victoria
Street


P.O.
Box 1826


Hamilton
HM HX


Bermuda


Attention:  Corporate Secretary


Telephone
No.:  441-297-9730


Telecopier
No.:  441-297-9704


Email:  rebecca.carne@marshmc.com


 


With
a copy to:


 


ACE
Capital Re Inc.


1325
Avenue of the Americas


New
York, NY  10019


Attention:  General Counsel


Telephone
No.:  212-974-0100


Telecopier
No.:  212-581-3268


Email:  nbregman@acecapitalre.com


 


Any party may, by notice given
in accordance with this Agreement to the other party, designate another address
or person for receipt of notices hereunder.


 


16.2.        Amendment.  This Agreement may not be modified, changed,
discharged or terminated, except by an instrument in writing signed by an
authorized officer of each of the parties hereto.


 


16.3.        Counterparts.  This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. 
Each counterpart may consist of a number of copies hereof each signed by
less than all, but together signed by all, of the parties hereto.


 


16.4.        No Third Party Beneficiaries.  Nothing in this Agreement is intended or
shall be construed to give any Person, other than the parties hereto, their
successors and permitted assigns, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.


 


16.5.        Assignment; Subcontracting.  This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
permitted assigns and legal representatives. 
Except as provided by the last sentence of this Section 16.5, neither
party may assign any of its obligations under this Agreement without the prior
written approval of the other party, but Administrator may, subject to
applicable law, subcontract for the provision of any of its Administrative
Services without such approval.  In the
event of any such subcontracting,


 


10

















 


Administrator
shall continue to be bound by all of its obligations under this Agreement and
shall be solely responsible for the performance and compensation of
subcontractors.  Notwithstanding the
foregoing, Administrator may assign this Agreement to any affiliate of
Administrator in Administrator’s sole discretion.


 


16.6.        Governing Law.  THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF BERMUDA, WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.


 


16.7.        Entire Agreement.  This Agreement and the Reinsurance Agreement
constitute the entire agreement between the parties hereto relating to the
subject matter hereof and supersede all prior and contemporaneous agreements,
understandings, and discussion of the parties.


 


11

















 


IN WITNESS WHEREOF, the Company
and the Administrator have executed this Administrative Services Agreement in
Hamilton, Bermuda as of the date first above written.


 


	
   

  	
  COMMERCIAL
  GUARANTY ASSURANCE, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE
  CAPITAL RE OVERSEAS LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  



 


12

















 


Exhibit B


 


Trust
Agreement


 

















 


TRUST AGREEMENT


 


TRUST AGREEMENT,
dated as of
August           , 2001
(the “Agreement”), among ACE  American Insurance
Company, an insurance company organized under the laws of
Pennsylvania (the “Grantor”), and ACE Capital
Re Overseas Ltd., a company with limited liability organized under
the laws of Bermuda (together with any successor thereof by operation of law,
including, without limitation, any liquidator, rehabilitator, receiver or
conservator, the “Beneficiary”), and State
Street Bank and Trust Company, a banking corporation organized and
existing under the laws of Massachusetts (the “Trustee”) (the Grantor, the
Beneficiary and the Trustee are hereinafter each sometimes referred to
individually as a “Party” and collectively as the “Parties”).


 


WITNESSETH:


 


WHEREAS, the
Grantor and the Beneficiary have entered into a Retrocession Agreement, dated
as of the date hereof (the “Retrocession Agreement”); and


 


WHEREAS, the
Beneficiary desires the Grantor to secure payments of all amounts at any time
and from time to time owing by the Grantor to the Beneficiary under or in
connection with the Retrocession Agreement; and


 


WHEREAS, the
Grantor desires to transfer to the Trustee for deposit to a trust account (the
“Trust Account”) assets in order to secure payments under or in connection with
the Retrocession Agreement; and


 


WHEREAS, the
Trustee has agreed to act as trustee and entitlement holder hereunder, and to
hold such assets in the Trust Account for the sole use and benefit of the
Beneficiary; and


 


WHEREAS, this
Agreement is made for the sole use and benefit of the Beneficiary and for the
purpose of setting forth the duties and powers of the Trustee with respect to
the Trust Account;


 


NOW, THEREFORE,
for and in consideration of the promises and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Parties hereby agree as follows:


 

















 


SECTION 1.  Deposit of
Assets to the Trust Account.


 


(a)           The Grantor shall establish the
Trust Account in the name of the Trustee, as owner and entitlement holder, for
the benefit of the Beneficiary.  The
Trustee shall administer the Trust Account in its name as trustee and
entitlement holder for the sole use and benefit of the Beneficiary.  To further secure its obligations under the
Retrocession Agreement, the Grantor hereby grants, conveys, transfers and
assigns to the Trustee for the benefit of the Beneficiary a security interest
in and to (i) the Trust Account, (ii) any and all financial assets now, or in
the future, deposited in, credited to and maintained therein, (iii) any deposit
account in which Trust Account assets are maintained, and (iv) all financial
assets now, or in the future, deposited in or credited to securities accounts
in the name of the Trustee pursuant to Section 7(d) of this Agreement in which
Assets (as defined below) are maintained for the benefit of the Beneficiary.  The Trust Account shall be subject to
withdrawal by the Beneficiary solely as provided herein.  All Assets at all times shall be maintained
in the Trust Account, separate and distinct from all other assets, and shall be
continuously kept in a safe place at the Trustee’s office within the United
States of America.


 


(b)           The Grantor shall transfer to
the Trustee, for deposit to the Trust Account, the sum of sixty million dollars
($60,000,000), and may transfer or cause to be transferred to the Trustee, for
deposit to the Trust Account, such other assets as it may from time to time
desire (all such assets actually received in the Trust Account are herein
referred to individually as an “Asset” and collectively as the “Assets”). The
Assets shall be valued according to their current fair market value and shall
consist only of cash (United States legal tender) and Eligible Securities (as
hereinafter defined).


 


(c)           The Grantor shall, upon
execution of this Agreement, and from time to time thereafter as required, execute
assignments and endorsements in blank or transfer legal title to the Trustee of
all securities or other property standing in the Grantor’s name which are
delivered to the Trustee to form part of the Trust Account in such form that
the Beneficiary whenever necessary may, and the Trustee upon direction by the
Beneficiary shall, negotiate any such Assets without consent or signature from
the Grantor or any person or entity. 
Any Assets received by the Trustee which are not in such proper
negotiable form shall not be accepted by the Trustee and shall be returned to
the Grantor as unacceptable.  All Assets
transferred by the Grantor to the Trustee for deposit to the Trust Account
shall consist only of cash and Eligible Securities.


 


(d)           The Trustee shall have no
responsibility to (i) value the Assets or (ii) determine whether the Assets in
the Trust Account are sufficient to secure the Grantor’s liabilities under the
Retrocession Agreement.


 


SECTION 2.  Withdrawal
of Assets from the Trust Account.


 


(a)           Without notice to the Grantor,
the Beneficiary shall have the right, at any time and from time to time, to
withdraw from the Trust Account, subject only to written notice from the
Beneficiary to the Trustee (the “Withdrawal Notice”), such Assets as are
specified in such


 


2

















 


Withdrawal
Notice.  The Withdrawal Notice may
designate a third party (the “Designee”) to whom Assets specified therein shall
be delivered and may condition delivery of such Assets to such Designee upon
receipt, and deposit to the Trust Account, of other Assets specified in such
Withdrawal Notice.  The Beneficiary need
present no statement or document in addition to a Withdrawal Notice in order to
withdraw any Assets; nor is said right of withdrawal or any other provision of
this Agreement subject to any conditions or qualifications not contained in
this Agreement.


 


(b)           Upon receipt of a Withdrawal
Notice, the Trustee shall immediately take any and all steps necessary to
transfer absolutely and unequivocably all right, title and interest in the
Assets specified in such Withdrawal Notice and shall deliver custody of such
Assets (including physical custody of Assets held in certificated form) to or
for the account of the Beneficiary or such Designee as specified in such
Withdrawal Notice.


 


(c)           Subject to Section 4 of this
Agreement, in the absence of a Withdrawal Notice the Trustee shall allow no
substitution or withdrawal of any Asset from the Trust Account.


 


(d)           The Trustee shall have no
responsibility whatsoever to determine that any Assets withdrawn from the Trust
Account pursuant to this Section 2 will be used and applied in the manner
contemplated by Section 3 of this Agreement.


 


SECTION 3. 
Application of Assets.


 


The
Beneficiary hereby covenants to the Grantor that, in accordance with the
Retrocession Agreement, it shall use and apply any withdrawn Assets, on the
basis of the liability of the Beneficiary under the Underlying Agreement (as
defined in the Retrocession Agreement), without diminution because of the
insolvency of the Beneficiary or the Grantor, only to pay to the Beneficiary an
amount equal to the Grantor’s quota share of the liabilities (including
Ultimate Net Loss, Litigation Losses and the C Profit Share, each as defined in
the Underlying Agreement) paid or due to be paid by the Beneficiary under the
Underlying Agreement.


 


SECTION 4. 
Redemption, Investment and Substitution of Assets.


 


(a)           The Trustee shall surrender for
payment all maturing Assets and all Assets called for redemption and deposit
the principal amount of the proceeds of any such payment to the Trust Account.


 


(b)           The Grantor, subject to the
prior written approval of the Beneficiary, may retain (and pay the service fees
of) a professional asset manager (the “Asset Manager”) to manage and make
investment decisions with regard to the Assets held by the Trustee in the Trust
Account.  Subject to Section l(c) of
this Agreement, the Grantor or the Asset Manager (if any) may direct the
Trustee to invest such Assets in Eligible Securities and the Trustee, at the
direction of the Grantor or the Asset Manager (if any) will cause the Assets
held in the Trust Account to be invested in Eligible Securities.  Unless and until directed in accordance with
this Agreement by the Grantor, the Trustee will not be required to take any
action with respect to the investment or reinvestment of the Assets.  The Trustee shall


 


3

















 


have
no responsibility whatsoever to determine that any Assets in the Trust Account
are or continue to be Eligible Securities.


 


(c)           From time to time, subject to
the prior written approval of the Beneficiary, the Grantor or the Asset Manager
(if any) may direct the Trustee to substitute Eligible Securities for other
Eligible Securities held in the Trust Account at such time, provided that such
substituted Eligible Securities are at least equal in value to the market value
of the Eligible Securities withdrawn. 
The Trustee shall have no responsibility whatsoever to determine the
value of such substituted securities or that such substituted securities
constitute Eligible Securities.


 


(d)           The Trustee is authorized,
without further instructions, to exchange securities in temporary form for
securities in definitive form, to effect an exchange of the shares where the
par value of stock is changed.


 


(e)           The Trustee will have no duty to
notify the Grantor of any rights, duties, limitations, conditions or other
information set forth in any security (including mandatory or optional put,
call and similar provisions), but the Trustee will forward to the Grantor any
notices or other documents received in regard to any such security.


 


(f)            The
Grantor hereby authorizes the Trustee to disclose the Grantor’s name, address
and securities positions to issuers of securities held in the Trust Account if,
and as to the extent that, the law may require such disclosure.


 


(g)           Any loss incurred from any
investment pursuant to the terms of this Section 4 shall be borne exclusively
by the Trust Account.  The Trustee shall
not be liable for any loss due to changes in market rates or penalties for
early redemption.


 


SECTION 5.  Interest
and Dividends.


 


All
payments of interest and dividends actually received in respect of Assets in
the Trust Account shall be deposited by the Trustee to, and shall become part
of, the Trust Account.


 


SECTION 6.  Right to Vote Assets.


 


The
Trustee shall forward all annual and interim stockholder reports and all
proxies and proxy materials relating to the Assets in the Trust Account to the
Grantor within a reasonable period of time following the Trustee’s receipt
thereof.  The Grantor shall have the
full and unqualified right to vote and execute consents and to exercise any and
all proprietary rights not inconsistent with this Agreement with respect to any
Assets in the Trust Account.


 


SECTION 7.  Additional
Rights and Duties of the Trustee.


 


(a)           The Trustee shall be liable for
its own negligence, willful misconduct or lack of good faith arising out of or
in connection with the performance of its obligations in accordance with the
provisions of this Agreement.


 


4

















 


(b)           The Trustee shall notify the
Grantor and the Beneficiary in writing within ten days following each deposit
to, or withdrawal from, the Trust Account.


 


(c)           Before accepting any Asset for
deposit to the Trust Account, the Trustee shall determine that such Asset is in
such form that the Beneficiary whenever necessary may, or the Trustee upon
direction by the Beneficiary will, negotiate such Asset without consent or
signature from the Grantor or any person or entity other than the Trustee in
accordance with the terms of this Agreement.


 


(d)           The Trustee may deposit any
Assets in the Trust Account in the centralized National Book-Entry System of
the Federal Reserve or in depositories such as the Depository Trust
Company.  Assets may be held in the name
of a nominee maintained by the Trustee or by any such depository.  Nothing contained in any contract between
the Trustee and any entity authorized to hold Assets in accordance with this
paragraph (d) will diminish or otherwise alter the liability of the Trustee to
the Grantor or the Beneficiary hereunder.


 


(e)           The Trustee shall accept and
open all mail directed to the Grantor or the Beneficiary in care of the
Trustee.


 


(f)            The
Trustee shall furnish to the Grantor and the Beneficiary a statement of all
Assets in the Trust Account upon the inception of the Trust Account and at the
end of each calendar quarter thereafter.


 


(g)           Upon the request of the Grantor
or the Beneficiary, the Trustee shall promptly permit the Grantor or the
Beneficiary, their respective agents, employees or independent auditors to
examine, audit, excerpt, transcribe and copy, during the Trustee’s normal
business hours, any books, documents, papers and records relating to the Trust
Account or the Assets.


 


(h)           Subject to the last sentence in
Section 17, with respect to Assets in the Trust Account, the Trustee is
authorized to follow and rely upon all instructions given by officers
designated in writing by the Grantor and the Beneficiary, respectively, in
accordance with the terms of this Agreement and by attorneys-in-fact acting
under written authority furnished to the Trustee by the Grantor or the
Beneficiary, including, without limitation, instructions given by letter,
facsimile transmission or electronic media, if the Trustee believes such
instructions to be genuine and to have been signed, sent or presented by the
proper party or parties.  The Trustee
shall not incur any liability to anyone resulting from actions taken by the
Trustee in reliance in good faith on such instructions.  The Trustee shall not incur any liability in
executing instructions (i) from an attorney-in-fact prior to receipt by it of
notice of the revocation of the written authority of the attorney-in-fact or
(ii) from any officer of the Grantor or the Beneficiary designated in writing,
which may be updated from time to time.


 


(i)            The
duties and obligations of the Trustee shall only be such as are specifically
set forth in this Agreement, as it may from time to time be amended, and no
implied duties or obligations shall be read into this Agreement against the
Trustee.  Without limiting the


 


5

















 


generality
of the foregoing, the Trustee shall have no duties or obligations arising from
the Trustee acting as entitlement holder for the benefit of the Beneficiary,
including, without limitation, taking any action to perfect a security interest
hereunder.


 


(j)            No
provision of this Agreement shall require the Trustee to take any action which,
in the Trustee’s reasonable judgment, would result in any violation of this
Agreement or any provision of law.


 


(k)           The Trustee may confer with
counsel of its own choice in relation to matters arising under this Agreement
and shall have full and complete authorization from the other Parties hereunder
for any action taken or suffered by it under this Agreement or under any
transaction contemplated hereby in good faith and in accordance with opinion of
such counsel, other than with respect to withdrawals of Assets by the
Beneficiary.


 


SECTION 8.  The
Trustee’s Compensation, Expenses and Indemnification.


 


(a)           The Grantor shall pay the
Trustee, as compensation for its services under this Agreement, a fee computed
at rates as may be agreed to from time to time in writing between the Trustee
and the Grantor.  The Grantor shall pay
or reimburse the Trustee for all of the Trustee’s expenses, advances and
disbursements in connection with its duties under this Agreement (including
attorney’s fees and expenses), except any such expense or disbursement as may
arise from the Trustee’s negligence, willful misconduct or lack of good
faith.  The Grantor also hereby
indemnifies the Trustee for, and holds it harmless against, any loss,
liability, costs or expenses (including attorney’s fees and expenses) incurred
or made without negligence, willful misconduct or lack of good faith on the
part of the Trustee, arising out of or in connection with the performance of
its obligations in accordance with the provisions of this Agreement, including
any loss, liability, costs or expenses arising out of or in connection with the
status of the Trustee and its nominee as the holder of record of the Assets.  In no event shall the Trustee be liable for
indirect, special or consequential damages. 
The Grantor hereby acknowledges that the foregoing indemnities shall
survive the resignation of the Trustee or the termination of this Agreement.


 


(b)           No Assets shall be withdrawn
from the Trust Account or used in any manner for paying compensation to, or
reimbursement or indemnification of, the Trustee.


 


SECTION 9. 
Acceptance, Resignation and Removal of the Trustee.


 


(a)           The Trustee hereby accepts the
trust herein created and declared upon the terms herein expressed.


 


(b)           The Trustee may resign at any
time upon delivery of a written notice of resignation to the Beneficiary and
the Grantor, effective not less than ninety (90) days after receipt by the
Beneficiary and the Grantor of such notice.


 


6

















 


(c)           The Grantor may remove the
Trustee by delivery to the Trustee and the Beneficiary of a written notice of
removal, effective not less than ninety (90) days after receipt by the Trustee
and the Beneficiary of such notice.


 


(d)           No such resignation or removal
of the Trustee will be effective until a successor trustee has been duly
appointed and approved by the Beneficiary and the Grantor and all Assets in the
Trust Account have been duly transferred to the new trustee in accordance with
paragraph (e) of this Section 9.


 


(e)           Upon receipt of the notice of
removal or resignation as provided in paragraph (b) or (c) above, as
applicable, the Grantor shall appoint a successor trustee.  Any successor trustee must be a bank that is
a member of the Federal Reserve System and a Qualified United States Financial
Institution (as defined below) and must not be a Parent, a Subsidiary or an
Affiliate of the Grantor or the Beneficiary. 
Upon the acceptance of the appointment as trustee hereunder by a
successor trustee and the transfer to such successor trustee of all Assets in
the Trust Account, the resignation or removal of the Trustee shall become
effective.  Thereupon, such successor
trustee shall succeed to and become vested with all the rights, powers,
privileges and duties of the Trustee, and the Trustee shall be discharged from
any future duties and obligations under this Agreement, but the Trustee shall
continue after its resignation to be entitled to the benefits of the
indemnities provided herein for the Trustee.


 


SECTION 10.       Termination of the Trust Account.


 


The
Trust Account and this Trust Agreement shall be effective until terminated by
thirty (30) days’ advance written notice sent to the Trustee jointly by the
Grantor and the Beneficiary.  Upon the
termination of the Trust Account, the Trustee shall transfer, pay over and
deliver the remaining assets of the Trust Account as directed in such joint notice.


 


SECTION 11.       Definitions.


 


Except
as the context shall otherwise require, the following terms shall have the
following meanings for all purposes of this Agreement (the definitions to be
applicable to both the singular and the plural forms of each term defined if
both such forms of such term are used in this Agreement):


 


The
term “Affiliate” with respect to any corporation shall mean a corporation which
directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with, such corporation.  The term “control” (including the related
terms “controlled by” and “under common control with”) shall mean the
ownership, directly or indirectly, of more than fifty percent (50%) of the
voting stock of a corporation.


 


The
term “American Institution,” as used in Schedule A, shall mean an institution
created or existing under the laws of the United States of America or of any
state, district or territory thereof.


 


7

















 


The
term “Business Day” shall mean any day on which the offices of the Trustee in
Boston, Massachusetts are open for business.


 


The
term “Eligible Securities” shall mean and include those assets of the types
described in Schedule A.


 


The
term “person” shall mean and include an individual, a corporation, a
partnership, an association, a trust, an unincorporated organization or a
government or political subdivision thereof.


 


The
term “Parent” shall mean an institution that, directly or indirectly, controls
another institution.


 


The
term “Qualified United States Financial Institution” shall mean an institution
that is (i) organized, or, in the case of a U.S. branch or agency office of a
foreign banking organization, licensed, under the laws of the United States or
any state thereof and has been granted authority to act with fiduciary powers;
and (ii) regulated, supervised and examined by federal or state authorities
having regulatory authority over banks and trust companies.


 


The
term “Subsidiary” shall mean an institution controlled, directly or indirectly,
by another institution.


 


SECTION 12.       Governing Law.


 


This
Agreement shall be subject to and governed by the laws of the State of New
York.


 


SECTION 13.       Successors and Assigns.


 


No
Party may assign this Agreement or any of its obligations hereunder without the
prior written consent of the other Parties; provided, however, that this
Agreement will inure to the benefit of and bind those who, by operation of law,
become successors to the Parties, including, without limitation, any
liquidator, rehabilitator, receiver or conservator and any successor merged or
consolidated entity and provided further that, in the case of the Trustee, the
successor trustee is eligible to be a trustee under the terms hereof.


 


SECTION 14.       Severability.


 


In the
event that any provision of this Agreement shall be declared invalid or
unenforceable by any regulatory body or court having jurisdiction, such
invalidity or unenforceability shall not affect the validity or enforceability
of the remaining portions of this Agreement.


 


8

















 


SECTION 15.       Entire Agreement.


 


This
Agreement (including the Schedules hereto) constitutes the entire agreement
among the Parties, and there are no understandings or agreements, conditions or
qualifications relative to this Agreement which are not fully expressed in this
Agreement.


 


SECTION 16.       Amendments.


 


This
Agreement may be modified or otherwise amended, and the observance of any term
of this Agreement may be waived, if such modification, amendment or waiver is
in writing and signed by all of the Parties.


 


SECTION 17.       Notices, etc.


 


Unless
otherwise provided in this Agreement, all notices, directions, requests,
demands, acknowledgments and other communications required or permitted to be
given or made under the terms hereof shall be in writing and shall be deemed to
have been duly given or made (a)(i) when delivered personally, (ii) when made
or given by facsimile transmission, or (iii) when sent by express delivery and
(b) when addressed as follows:


 


If
to the Grantor to it at:


 


ACE
Financial Solutions


1133
Avenue of the Americas


32nd
Floor


New
York, New York  10036


Telephone
No.: 212-642-7807


Telecopier
No.: 212-642-7889


 


If
to the Beneficiary:


 


ACE
Capital Re Overseas Ltd.


11
Victoria Hall


Victoria
Street


P.O.
Box 1828


Hamilton
HM HX


Bermuda


Attention:  Corporate Secretary


Telephone
No.:  441-297-9730


Telecopier
No.:  441-297-9704


 


9

















 


With
a copy to:


 


ACE
Capital Re Inc.


1325
Avenue of the Americas


New
York, New York  10019


Attention:  General Counsel


Telephone
No.:  212-974-0100


Telecopier
No.:  212-581-3268


 


If
to the Trustee:


 


State
Street Bank and Trust Company


801
Pennsylvania Avenue


Kansas
City, Missouri 64105


Attention:  Vice President, Insurance Custody


Telephone
No.:  (816) 871-4100


Telecopier
No.:  (816) 871-9210


 


Each
Party may from time to time designate a different address for notices,
directions, requests, demands, acknowledgments and other communications by
giving written notice of such change to the other Parties.  All notices, directions, requests, demands,
acknowledgments and other communications relating to the Beneficiary’s approval
of the Grantor’s authorization to substitute Assets and to the termination of
the Trust Account shall be in writing and may not be made or given by facsimile
transmission or electronic media.


 


SECTION 18.  Headings.


 


The
headings of the Sections have been inserted for convenience of reference only,
and shall not be deemed to constitute a part of this Agreement.


 


SECTION 19. 
Counterparts.


 


This
Agreement may be executed in any number of counterparts, each of which when so
executed and delivered shall constitute an original, but such counterparts
together shall constitute one and the same Agreement.  All signatures of the Parties may be transmitted by facsimile,
and such facsimile transmission will, for all purposes, be deemed to be the
original signature of such Party whose signature it reproduces and will be
binding upon such Party, provided that the Parties provide hard copy original
signatures to each other following execution.


 


10

















 


SECTION 20.  Force
Majeure.


 


In the
event that any Party is unable to perform its obligations under the terms of
this Agreement because of acts of God, strikes, equipment or transmission
failure or damage reasonably beyond its control, or other cause reasonably
beyond its control, such Party will not be liable for damages to the other
Parties for any unforeseeable damages resulting from such failure to perform or
otherwise from such causes.  Performance
under this Agreement will resume when the affected Party is able to perform
substantially that Party’s duties.


 


SECTION 21.  Trust
Account Records.


 


The
Trustee will keep full and complete records of the administration of the Trust
Account.  The Grantor, the Beneficiary
and the Insurance Department of the Beneficiary’s domiciliary jurisdiction may
examine such records at any time during the Trustee’s business hours, upon
reasonable request.


 


11

















 


IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.


 


 


	
   

  	
  ACE
  American Insurance Company,

  as Grantor

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  ACE
  Capital Re Overseas Ltd,

  as Beneficiary

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  State
  Street Bank and Trust Company,

  as Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Its:

  	
   

  



 


12

















 


SCHEDULE A


 


Eligible Securities


 


The
following shall be Eligible Securities provided that, at the time of deposit,
such securities are (a) rated A or higher by a nationally recognized rating
agency; (b) secured by sufficient collateral; (c) insured by an appropriately
licensed insurer (other than the investing insurer or its affiliate) that has a
rating of A or higher from A.M. Best Company, Inc. (or an equivalent rating
from another nationally recognized rating agency); or (d) rated in the highest
category by the Securities Valuation Office of the National Association of
Insurance Commissioners:


 


I.              Government obligations - any obligation that is issued,
assumed, guaranteed or insured by the U.S. or any agency thereof, by any U.S.
state, by any municipality or by any state agency (excluding any municipality
or state agency bond payable only out of special assessments on local
properties);


 


II.            Obligations of American Institutions - any
obligation issued or guaranteed by any solvent American Institution with the
exception of insurance companies, provided that such obligations are not in
default as to principal or interest;


 


III.           Preferred or guaranteed shares of solvent American
Institutions - permissible provided that all obligations of the issuer
(not merely the investment to be deposited) satisfy the credit quality criteria
(a) or (d) in the first paragraph above;


 


IV.           Equity Interests - Investments in common shares
or partnership interests of any solvent American Institution, provided that the
share/interest is registered on a national securities exchange (or quoted
through NASDAQ) or otherwise registered pursuant to the Securities Exchange Act
of 1934. All obligations and preferred shares (if any) of the issuer (not merely
the investment to be deposited) must be eligible investments pursuant to
Section 1404(a) of the New York Insurance Law;


 


V.            Investment Companies -


 


1.             Investment
company that invests at least 90% of assets in investments qualifying under
Items (I), (II) and (III) above.


 


2.             Investment
company that invests at least 90% of assets in investments qualifying under
Item (IV) above; and


 


VI.           Asset backed securities - Pass-through certificates,
participation interests, trust certificates or obligations, collateralized debt
obligations, limited recourse securities and similar securities, in each case
secured by pooled receivables arising from the sale or use of personal property
or the sale or use of real property or secured by mortgages on real property or
other pooled receivables or assets that provide similar diversified credit risk
and certificates, interests, limited recourse debt securities and similar
securities secured by any of the foregoing securities.